The current leaders in the race toward a $5 trillion valuation seem obvious if you focus mainly on headlines: Nvidia, Apple, or Microsoft all appear likely to cross that milestone in the coming years.
Yet another compound growth story is unfolding in the world of big tech that it would be easy to overlook. With a market-leading cloud computing business, a high-margin advertising business, and a faster, automated logistics network that continues to lower costs, Amazon (AMZN +2.02%) may soon take the investing world by surprise. Here's why Amazon's market capitalization could cross $5 trillion by 2030.
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Impressive financial performance
Amazon's recent financial results have been impressive. In the second quarter, revenues were up 12% year over year to $167.7 billion, while operating income surged 31% to $19.2 billion. Its cloud computing business, Amazon Web Services (AWS), saw revenues grow 17.5% to $30.9 billion, while advertising revenues were up 22% to $15.7 billion. Amazon has also generated a robust $18.2 billion free cash flow in the last four reported quarters.
NASDAQ: AMZN
Key Data Points
Management expects revenues to fall in the range of $174 billion to $179.5 billion in the third quarter, including a modest positive impact from foreign currency fluctuations.
AWS Strength
Amazon is the leader in the global cloud infrastructure market with a 30% share, and AWS will continue to benefit from the transition of more IT work from on-premises infrastructure to cloud-based systems. Currently, an estimated 85% to 90% of IT spending goes to on-premises systems, but that mix is set to shift as the adoption of AI accelerates. AWS is also well positioned to capitalize on the increasing shift of enterprise AI spending from model training to inference workloads -- the real-time deployment of AI models. Eventually, inference is expected to account for nearly 80% to 90% of total AI costs as pilot projects advance into commercial use.
Generative AI inference is also expected to become a standard service, similar to computing, storage, or databases. We can expect that companies will prefer to run these workloads in the same cloud regions as their other applications and enterprise data. Since there are more applications running on AWS than anywhere else, and vast amounts of enterprise data are stored there, it could become the preferred cloud computing platform for inference workloads.
AWS is also pushing down its AI costs. Management claims that its custom Trainium2 chip delivers approximately 30% to 40% better price performance for inference than other chipmakers' GPUs. Anthropic is training its next Claude models on Trainium2, and Amazon Bedrock uses it for inference. The company is also working on the third iteration of the Trainium chip, which is expected to be even more effective for computing and inference workloads. Based on all that, the price-performance edge could become a long-term differentiator for AWS.
AWS clocked an impressive annualized revenue run rate of $123 billion as of the end of the second quarter. The cloud computing business also had an incredible backlog of $195 billion, up 25% year over year, giving it significant visibility into its future revenues. Additionally, management expects demand to keep outpacing available capacity. These conditions are expected to improve in the next several quarters.
Advertising business
Amazon's advertising offerings, spanning its retail marketplace, Prime Video, Twitch, Fire TV, and live sports, help advertisers reach an audience of more than 300 million people in the U.S.
In June, Amazon partnered with Roku to give advertisers using the Amazon demand-side platform access to over 80 million connected TV households in the U.S. Amazon has also integrated its demand-side platform with Disney's real-time ad exchange, thereby giving advertisers direct programmatic access to premium ad inventory on platforms such as Disney+, ESPN, and Hulu. With access to customers' identity, Amazon's shopping signals, and premium streaming inventory, advertisers will be better able to effectively target the audiences they're aiming for. This, in turn, is expected to boost the advertising business in the coming quarters.
Improving retail margins
Amazon is focusing on improving its retail margins, too. It reorganized its U.S. logistics network around a regional structure, placing inventory closer to customers, increasing direct lanes, and enhancing product consolidation. All of this cut miles and human touches out of the process, speeding delivery and lowering costs. Combined with large-scale automation and robotics, including its DeepFleet AI system, the retail business is on a path to higher margins
How will Amazon become a $5 trillion company?
Amazon trades today at a cheap valuation of just 3.7 times sales. To become a $5 trillion company, it would not need to expand its valuation multiples to unsustainable levels.
If AWS continues to grow revenues at a low-to-mid-teens percentage as its capacity increases and inference workloads ramp up, advertising grows at a rate in the high-teens to 20% due to robust connected TV partnerships, and retail margins improve thanks to the benefits of the regional network and automation, Amazon will have a potent revenue mix and enhanced margins. While AWS and the advertising business will boost profitability, the retail segment will help reduce the company's cost to serve customers -- translating into higher profit margins, robust cash flows, and better visibility. That setup is far stronger than Amazon enjoyed when its valuation peaked at around 4.6 times sales earlier in the decade. Back then, its advertising business was smaller, its AI opportunity was limited, and its logistics were far less efficient.
Now, we can expect the company to be trading at a price-to-sales (P/S) multiple of 5 to 7 by 2030, reflecting the blended effect of higher multiples for its cloud computing and advertising businesses, and lower multiples attributed to the slower growth of its retail business. The company can trade at even higher multiples if it continues its leadership in AI inference.
Analysts expect Amazon's revenues will be nearly $1.15 trillion in 2030. Assuming that P/S multiple expands to even 5, then we can expect Amazon's market capitalization to be almost $5.75 trillion by 2030 -- well above the $5 trillion mark.
