Each of the world's largest companies currently hovers around the low $3 trillion mark, but eventually, we'll likely see a $5 trillion business. Just a few years ago, nobody had ever seen a $1 trillion company.
One company likely to reach $5 trillion over the next decade is Amazon (AMZN 0.20%). Amazon is an e-commerce giant, but its other offerings are what could propel it over the threshold.
Image source: Getty Images.
AWS is the star of the show
Online stores are Amazon's largest revenue segment, generating $57.4 billion in revenue during Q1. However, commerce revenue has notoriously slim margins, so it's unlikely that Amazon makes much profit from this segment. Additionally, online sales were Amazon's slowest-growing segment in Q1, apart from its "other" segment, with sales rising only 5% year over year.
Companywide, Amazon's sales rose 9% year over year, and operating income increased by 20%. How is this possible when its biggest and most recognizable component isn't faring well?
The part of Amazon's business that's often overlooked, yet that I would argue is far more important than its online stores, is Amazon Web Services (AWS). AWS is Amazon's cloud computing division, and it accounted for only 19% of sales in Q1. But what's more important is that AWS generated a 39% operating margin within its division and accounts for 63% of Amazon's total operating profit.
This indicates that AWS steers Amazon's profit picture, and the one investors will focus on the most.
Fortunately for investors, there's still a massive growth runway for AWS, which is being powered by two trends: artificial intelligence (AI) and a general migration to the cloud.
AI has been a huge boon to cloud computing companies, as clients are looking to train and run AI models on these companies' servers instead of purchasing the expensive equipment themselves. The AI arms race is far from over, and AWS still has a ton of benefits to realize from this growing trend. Additionally, companies are still working on transitioning their workloads to the cloud, a process that across the entire economy will take over a decade to complete. By migrating to the cloud, businesses can eliminate the risk that having a single point of failure for data storage and access creates. They can also lessen or eliminate the need to purchase and maintain expensive computing equipment.
Grand View Research estimates that the global cloud computing market was more than $750 billion in 2024 and expects it to rise to nearly $2.4 trillion by 2030. That projection includes multiple cloud companies, not just cloud infrastructure companies like AWS. But the general trend is there, and with a projected compounded annual growth rate for the industry of 20%, AWS will be set to deliver strong growth for years to come.
AWS's growth can push Amazon to the $5 trillion mark
Over the past 12 months, AWS generated around $112 billion in sales. Revenue grew 17% last quarter, slightly slower than market analysts expected it to grow. If AWS's revenue sustains that 17% growth rate over the next five years, its revenue will increase from $112 billion to $246 billion. If AWS can maintain its 39% operating margin, it will generate $97 billion in operating profits. For reference, Amazon generated $72 billion in operating profits over the past 12 months, with $42 billion coming from AWS.
So even if Amazon's commerce platform isn't growing very fast, AWS can help propel Amazon to a $5 trillion valuation. It won't happen overnight, but if Amazon continues on its current trajectory, it's a near certainty.
