One of the questions I always ask myself when considering a stock to buy is whether I think it has the potential to double in value within the next five years. It's a good gauge to determine whether the stock has the strong mix of value and growth potential to be a solid investment.
The point is not about whether you can quickly double your money from an investment, but whether it has enough upside to be a good growth stock.
Amazon (AMZN 3.12%) is an intriguing option because it isn't a cheap stock. In fact, it's one of the most valuable companies in the world, with a market cap of around $2.5 trillion. For it to double in value, you would need to believe it can get to $5 trillion. The business has been expanding and continues to grow, but does it truly have the potential to double your money within the next five years?
Let's lay out both the bullish and bearish cases.
Image source: Getty Images.
Why Amazon could double in value
Amazon has no shortage of catalysts that could help its top and bottom lines rise in the future.
A big one is undoubtedly Amazon Web Services (AWS). As companies spend more money to invest into artificial intelligence (AI) and put more data onto the cloud, AWS is likely going to benefit from an increase in demand.
And that's great news for investors because AWS accounts for the bulk of the company's operating income. During the first six months of the year, Amazon's operating income has totaled $37.6 billion, and $21.7 billion of that has come from AWS.
There are many other opportunities related to AI for Amazon to pursue as well. For example, it has launched an Alexa+ subscription service, which will give users access to an AI-enhanced personal assistant. For Prime members, there's no added charge for now, but those who aren't will pay $19.99 per month for Alexa's cutting-edge capabilities.
Amazon has also been investing billions into Anthropic, the company that developed the AI chatbot Claude. And it has launched an AI-powered assistant, Rufus, on its online marketplace. By leveraging generative AI more deeply into its operations, that could help the company not only cut costs but also boost revenue by unlocking new growth opportunities and selling more products.
There's a ton of growth potential for Amazon related to AI, which is why the upside can be significant for the stock in the long run.
Why Amazon's stock might not double
As robust as Amazon's business is, it remains vulnerable to macroeconomic conditions. If there's a recession in the near future due to tariffs and global trade wars, that could lead to a pullback on spending on its online marketplace.
Companies may also trim their AI and tech-related budgets, and slowing growth for AWS could be what triggers a sell-off of the stock. AWS is often seen as the big growth machine for Amazon, and how it performs could weigh heavily on its shares.
A more serious long-term concern is that its sheer strength may be its undoing. The Federal Trade Commission alleges that Amazon has an online retail monopoly. How that plays out could not only affect profitability but also cast doubt over its long-term prospects. Its online marketplace is still the company's core business, and an unfavorable antitrust ruling could severely hurt the stock's valuation.
Furthermore, amid a flurry of AI stocks and new tech companies garnering attention from investors, there may simply not be as much of an appetite to pay a big premium for Amazon anymore. In the past, it wasn't uncommon to see the stock trading at well over 50 times its trailing earnings. Now, it's trading at a price-to-earnings multiple of 35. If Amazon doesn't show that it's a leader in AI, investors may not be prepared to pay as much of a premium for the business as they have in the past, which could limit its upside.
Is it likely that Amazon's stock doubles in five years?
Amazon may not be the flashiest AI stock right now, but it's been leading the charge on AI for years. Investors may be focusing on other stocks instead, which could explain its lackluster 5% gains since the start of the year.
But with so much potential and so many opportunities related to AI, I believe this is a stock that could double in five years. Despite its underwhelming performance this year, Amazon is one of the best growth stocks to buy and hold for the long haul.
