There are only four companies in the world with a market capitalization of at least $2 trillion: Microsoft, Apple, Nvidia, and Alphabet. Each of these megacap tech businesses are members of the Magnificent Seven -- a friendly moniker used to collectively describe the biggest movers and shakers in all things related to artificial intelligence (AI).
While Microsoft and Apple have been valued in excess of $2 trillion for quite some time, Nvidia reached the milestone earlier this year. Alphabet was minted into the club following an impressive first-quarter earnings report a few weeks ago.
There is one other member of the Magnificent Seven sitting on the doorstep of a $2 trillion valuation. E-commerce and cloud computing juggernaut Amazon (AMZN +3.47%) currently boasts a market capitalization of $1.9 trillion.
Not only does Amazon's entrance into the $2 trillion club look inevitable, but I think it'll arrive sooner than later. Let's explore how Amazon is igniting new waves of growth across the business, and assess if now is a good time to scoop up shares.
NASDAQ: AMZN
Key Data Points
Amazon's newest $100 billion business
When you think of Amazon, you probably think of its e-commerce marketplace. Over the last two decades, Amazon has become the de facto landing page for online shoppers. Unsurprisingly, online sales consistently ranks as Amazon's largest source of revenue.
However, another area that Amazon helped pioneer is cloud computing. Indeed, Microsoft, Alphabet, Oracle, and many other tech titans all operate in the fiercely competitive cloud realm. Yet similar to its e-commerce blueprint, Amazon has made significant investments over many years, which has helped the company build the largest cloud platform on the market today.
For the quarter ended March 31, Amazon generated 17% growth year over year from its cloud division -- reaching $25 billion. Amazon Web Services (AWS) is now officially on a $100 billion revenue run rate, and is the company's third-largest business.
One of the more important investments Amazon has made to spur some acceleration in the cloud business is in generative AI. Last September, the company invested $4 billion into a start-up called Anthropic. The deal presents some strategic benefits for Amazon, and specifically as it pertains to the cloud.
Anthropic is using AWS as its primary cloud provider, and is training its AI models on Amazon's in-house Trainium and Inferentia graphics processing units (GPUs). These moves are imperative for Amazon to maintain its leadership position among cloud infrastructure providers.
Moreover, I see the real tailwinds from Anthropic stemming from lead generation. The inclusion of Anthropic in the AWS ecosystem should play a big role in accelerating sales of new AI-powered products such as Amazon Bedrock and more.
Image source: Getty Images.
Mountains of cash
It's encouraging to see that Amazon's top line is growing and that the company has clear ambitions in AI. However, the obvious concern about all of this is that these investments come with a hefty price tag.
Fear not! Not only is Amazon's revenue accelerating, but the company's financial flexibility is downright jaw-dropping. Over the last 12 months, Amazon has generated $50 billion of free cash flow.
In addition to Anthropic and home-grown semiconductor chips, Amazon also recently announced an $11 billion investment to build out data centers. Considering that Amazon ended the first quarter with $85 billion of cash on the balance sheet, I'm not worried about the company's spending spree. Throughout its history, Amazon has proven one thing over and over again: The company's managers are terrific capital allocators.
Building best-in-class e-commerce and cloud computing technologies is no easy feat. And yet, the investments Amazon has made over the decades have resulted in multiple businesses eclipsing $100 billion in sales. Furthermore, as these businesses have scaled, Amazon has achieved a high degree of operating efficiency in the form of consistent and robust profits.
AI is the next frontier at Amazon, and the company is going back to its original playbook: Making investments today to lay the groundwork for tomorrow.
Next stop? $2 trillion
Over the last year, shares of Amazon have risen 56% -- handily topping the S&P 500 and Nasdaq Composite. With shares hovering near all-time highs, it's fair to say that Amazon's valuation has become a bit stretched. But even so, at a price-to-sales (P/S) ratio of 3.3, Amazon stock looks like a good buy right now compared to historical levels.
AMZN PS Ratio data by YCharts
Think of it this way: 10 years ago, Amazon was a drastically different business. And yet today, even with all of the progress the company has made in the cloud and the soaring profitability metrics, the company's P/S is only narrowly higher than its 10-year average.
The key ideas here are that Amazon is emerging as a leader in AI, and the company's accelerating sales and cash flow undermine its ability to grow and do so in a prudent fashion. I think now is a great time to scoop up shares of Amazon and hold for the long run -- $2 trillion and beyond.
