Investors have been in love with Apple for a long time. It was the largest company in the world by market capitalization for many years, driven by the growth of the iPhone. Now, it has been eclipsed by competitors like Microsoft and Nvidia as Apple's revenue growth slows in the face of rapid growth from these other technology players.
While Microsoft and Nvidia are solid bets to reach a $10 trillion market cap, I think another big technology player will get there first: Amazon (AMZN 0.18%). Its dual growth engines and profit margin expansion potential have the company poised to be the first stock to eclipse a $10 trillion valuation.
Here's why Amazon -- not Apple -- will be the first stock to a $10 trillion market cap.
Image source: Getty Images.
Multiple engines of growth
What makes Amazon special is its leading presence in two different sectors worth several hundred billion dollars, which will eventually grow into multitrillion-dollar opportunities. These are e-commerce and cloud computing.
E-commerce is still less than 20% of retail sales in the United States and has steadily grown for many decades. There is no reason to think this growth trajectory will slow anytime soon.
Amazon's combined North America and international sales were more than $500 billion over the last 12 months. When considering the long-term tailwind of e-commerce adoption, growing GDP around the world, and inflation, I believe these segments will easily double and surpass $1 trillion in revenue, with plenty of room to still grow.
Cloud computing is getting supercharged by artificial intelligence (AI), which is taking the industry, once thought to have a $1 trillion addressable market, to become much larger. Amazon's cloud computing division, Amazon Web Services (AWS), is going to capture the majority of the company's planned $100 billion in capital expenditures in 2025.
Growing 17% year over year at $112 billion in revenue, I think AWS has a clear path to expand to $200 billion and eventually $300 billion in revenue over the next decade and beyond.
Better margin expansion potential than other big tech
What makes Amazon a special case among the large technology players is the potential for great margin expansion at its increasingly large size. Over the last 12 months, Amazon's operating margin was 11% compared to Microsoft's 45%. Amazon's unit economics mean it will likely never reach a 45% profit margin, but there is much more room to grow compared to its cloud computing competitor.
AWS has an operating margin approaching 40% and is becoming a larger part of Amazon's business every year. Advertising, third-party seller services, and subscriptions are growing quickly at Amazon's retail segment. These will all be a rising tide to lift Amazon's profitability over the next 10 to 20 years. In the long run, I expect its operating margin to eclipse 20% due to the fast growth of these higher-margin segments.
AMZN Operating Margin (TTM) data by YCharts
The path to a $10 trillion Amazon market cap
Whether it takes 10, 15, or 20 years, I think Amazon's combined revenue will eventually reach $2 trillion. Its competitors in big tech do not have the large addressable market afforded to Amazon by dominating both e-commerce and cloud computing, which will limit revenue growth over the next 10 to 20 years. AI should supercharge growth in cloud computing over the next decade.
$2 trillion in revenue and a 20% operating margin equates to $400 billion in operating earnings. A $10 trillion market cap versus $400 billion in earnings is an earnings ratio of 25, which is entirely reasonable for a company like Amazon.
Compared to other technology players, Amazon has a much clearer revenue growth path to help it achieve the hundreds of billions of dollars in annual earnings needed to warrant this valuation. It may take over a decade, but Amazon stock is my bet to be the first stock with a $10 trillion market value.
