In the last 10 years, we've seen the markets hit some major numerical milestones from a market-capitalization perspective. Apple was the first trillion-dollar market-cap company back in 2018. The other "Magnificent 7" stocks -- so coined by Bank of America chief investment strategist Michael Hartnett as Apple, Alphabet, Amazon (AMZN 1.52%), Meta Platforms, Microsoft, Nvidia, and Tesla -- soon followed. Now, Apple, Microsoft, and Nvidia all trade at market caps above $3 trillion. That is a lot of moola.
The next big milestone will be a market cap of $10 trillion. Let the race begin today between the technology giants. Even though it is starting well behind some of the other Magnificent 7 stocks, I predict Amazon will be the first company to hit a market cap of $10 trillion. Here's why.
E-commerce has plenty of room to run
Amazon and its sprawling e-commerce empire are well-known. Looking at its North America segment -- which also houses segments such as hardware and advertising -- revenue hit $370 billion over the last 12 months ending in June of this year. Even though it has been around for so long and has many detractors in the media and government, Amazon is set to surpass 40% market share of U.S. e-commerce sales this year.
If Amazon can just maintain market share in the category, there is a ton of room for North American revenue to grow over the next five to 10 years. E-commerce is only 16% of retail sales in the United States today. If that eventually doubles to 32%, Amazon's North American annual revenue will hit $740 billion.
With high-fixed costs across its e-commerce supply chain, more revenue will lead to profit-margin expansion. There will also be benefits from fast growing advertising services and third-party seller revenue, which are becoming a larger piece of the Amazon retail pie. Over the last 12 months, Amazon's operating margin in North America was 5.6% and keeps marching higher. In the next 10 years, I think this segment can surpass a 15% operating margin.
A 15% operating margin on $740 billion in revenue is $111 billion in operating earnings just from the North American retail segment. Remember this number.
NASDAQ: AMZN
Key Data Points
Cloud computing and AI
On the other hand, Amazon has perhaps an even more promising division in Amazon Web Services (AWS). The leader in cloud computing is close to passing $100 billion in annual revenue and posts impressive profit margins above 30%. It is riding a wave of growth in artificial intelligence (AI) at the moment but aims to be the computing bedrock for all sorts of modern software and other applications.
Like e-commerce, the world is still in the early days of transitioning to cloud computing. On the latest conference call, executives reiterated that the "vast majority" of IT spending is still on-site. They believe it will eventually switch to cloud-computing solutions, which will benefit AWS.
AWS revenue is growing at close to 20% year over year right now. If this slows to an average of 15% per year over the next 10 years, the division will eventually generate $400 billion in annual revenue, which isn't a crazy assumption given that global IT spending is in the trillions and growing as a sector year after year.
Assuming operating margins stay at 30% or above, $400 billion in revenue equals $120 billion in operating income from AWS 10 years from now.
AMZN Market Cap data by YCharts.
The path to $10 trillion (and don't forget international growth)
Long story short, I think Amazon is the most likely company to hit a $10 trillion market cap due to the huge runway for growth in the e-commerce and cloud-computing sectors. This is an unmatched tailwind across even other Magnificent 7 stocks, which look closer to market saturation.
Now to the math that leads to a $10 trillion valuation. Add together $120 billion in earnings from AWS and $111 billion in earnings from North America, and Amazon will have a combined $231 billion in earnings 10 years from now. But don't forget the third pillar of Amazon's business: international retail. The segment generates $136 billion in revenue but has negligible profits due to exposure to emerging markets such as India.
As an earnings headwind today, markets such as India can be a huge growth driver if India's GDP per capita keeps growing at an impressive rate. A lot needs to go right in these other countries, but it is possible that the international segment can generate hundreds of billions in revenue and tens of billions in operating earnings 10 years from now if it can achieve similar profit margins as in North America.
Add it all together, and I think Amazon has a chance at generating $300 billion in earnings 10 years from now. At a price-to-earnings ratio (P/E) of 33 -- not unheard of for large technology stocks -- $300 billion in earnings equates to a $10 trillion market capitalization.
I know that is a lot of math, but this is the path for Amazon hitting the next market-cap milestone and winning the race to become the largest company in the world. Regardless of how fast it gets there, the stock looks like a buy-and-hold investment at a market cap of $1.86 trillion today.
