A $3 trillion market capitalization is big. Very big. Today, only three companies have larger market caps: Nvidia, Microsoft, and Apple. I think there's another artificial intelligence (AI) company that could be joining the club in the not-so-distant future -- Amazon (AMZN 1.19%).
NASDAQ: AMZN
Key Data Points
Currently, Amazon sits just above a $2 trillion valuation, nothing to shake a stick at, but only two-thirds that of the top companies. To join the club, the company has to see its stock price rise by 50%.
I'm confident this will happen at some point; the real question is when. Investors can consider what might be a reasonable time frame by looking at the numbers, but before getting too far in the weeds, let's take a look at the big picture. There are a few key strengths that I think will propel the company in the next few years, as well as some hurdles that could trip it up.
Amazon is delivering in its core business, and consumers can't get enough
In 2023, Amazon delivered 4 billion packages in the U.S. alone within one day of purchase. Customers take for granted how radically different this is from the paradigm Amazon disrupted -- I know I do. Few companies have had a bigger impact on the daily habits of consumers than Amazon.
Amazon controls more of the U.S. online retail space than the next 10 competitors combined, and its sales don't seem to be slowing. The company has been growing its share of the online market consistently. It's expected to surpass 40% this year, up from 38% in 2020. Amazon is capturing more and more of a growing market it already dominates. Think about your own behavior; do you think you will be more or less likely to order an item online five years from now?
Major growth opportunities lie ahead
E-commerce may be Amazon's bread and butter, but the company's Amazon Web Services (AWS) is a money-making machine. It's the leading cloud provider available, controlling 31% of the market.
The cloud was already profitable, but with the advent of artificial intelligence (AI), AWS is bringing in record revenue. Amazon reported a 17% year-over-year jump in revenue for Q1 as well as a near doubling of its operating income. In other words, the company is becoming more efficient. Although it's facing increasing competition from other cloud providers like Microsoft's Azure, AWS looks to be positioning itself well to take full advantage of the AI boom.
Amazon is also seeing strong, double-digit growth in its streaming and advertising business. Having built up a substantial audience for its streaming platform, it introduced a tiered system where users need to pay extra to avoid commercials. For those who opt for the ad-supported tier, Amazon sells incredibly valuable ad space to companies that understand Amazon knows a lot about its users. These changes led to a year-over-year jump in revenue of 26% for Q4 2023 and a 24% year-over-year jump for Q1 2024.
Amazon may face some regulatory headwinds
Although I think Amazon is on a good path, it's not without major obstacles that could slow it down. One of the most potentially destabilizing is the antitrust lawsuit it is facing from U.S. regulators. The Federal Trade Commission and a slew of states are accusing the company of employing anticompetitive strategies that allow the company to maintain its market dominance.
It is impossible to tell at this point what the outcome will be, and the ever-shifting winds of politics mean the case could be dropped, but the threat remains that Amazon may be forced to change how it operates and pay substantial penalties.
Amazon has a path to the $3 trillion club
When might Amazon join the club? Let's start by assuming its relative value in the market stays consistent. In other words, if its stock rises by 50%, it needs to make 50% more money.
Consensus estimates put Amazon's 2025 revenue at $710 billion. That's well short of the 50% increase, but if that rate of growth holds beyond 2025 -- about 15% compounded annually -- it will take just shy of three years. Now a 15% growth rate is phenomenal and at the upper end of what you should make a habit of expecting, but I think Amazon actually can do it faster. Here's why.
Revenue is only one part of the equation. The market often cares more about earnings per share (EPS) when valuing a company. Let's hold most of that formula constant and just look at net income. Amazon has been consistently growing net income in relation to revenue for some time. That is, its profit margins are growing.
If Amazon can grow margins from last quarter's 7.3% to just under 9%, the $710 billion in revenue expected in 2025 would be enough to grow its net income -- and EPS -- by 50% from today's level. The company could join the $3 trillion club in as little as a year-and-a-half.
Can it pull that off? I think that's possible given the high growth from its AI-fueled AWS and Amazon's ad businesses. As they become a larger mix of its total revenue, Amazon's overall margins will continue to grow.
Although these assumptions might not hold true, they show a path to a $3 trillion valuation for Amazon in the not-too-distant future.
