The $3 trillion club is getting surprisingly crowded. After Apple became the inaugural member, Microsoft and Nvidia have since gone further, and Nvidia's value has climbed over $4 trillion.
Last month, Alphabet joined the party, but it's been hanging on its back foot near the entrance as its market cap wavers up and down.
Over the next two years, we'll likely see at least one more company climb into the ranks of the $3 trillion club. It's a good bet the company will be closely tied to artificial intelligence (AI), as AI spending is expected to keep growing through the end of the decade. But even if AI growth falters, this company is well positioned to find itself in the $3 trillion club in the near future.
Here's why I predict Amazon (AMZN +1.43%) will join the megacap elite by 2027.
The cloud computing leader
Amazon is the pioneer in infrastructure-as-a-service with its Amazon Web Services business. Over the last 20 years or so, it's grown to become a $120 billion business, far bigger than Microsoft's $75 billion Azure cloud business or Alphabet's $50 billion Google Cloud.
But many are concerned that its smaller rivals got a leg up when it comes to AI services. To be sure, Microsoft's growth has been impressive, and Alphabet is seeing strong relative growth. But Amazon is building infrastructure as fast as it can, and management has reiterated that demand exceeds its supply as it works to build out capacity. That's a sentiment shared by Microsoft and Alphabet.
In the meantime, Amazon's AI services revenue is growing at a triple-digit rate off a multibillion-dollar revenue base.
However, Amazon is in a prime spot to benefit from the increasing investment in AI, as well as the ongoing shift of business computing from local servers to the cloud. That long-term trend can provide consistent sales growth even if AI spending slows. But the growth of AI and broader adoption from businesses could accelerate the long-term trend of migrating other computing needs to AWS.
That should make investors more comfortable with the huge amounts management is spending to meet demand for AI services. Management plans to spend over $100 billion on capital expenditures in 2025 to build out data centers. That's weighed on free cash flow, which fell to just $18 billion in the trailing 12 months from $53 billion in the 12 months prior.
Not only is that spending supported by the expected growth in demand, but Amazon is a market leader in two other businesses as well.
NASDAQ: AMZN
Key Data Points
The increasingly profitable core business
While Amazon's cloud business gets all the attention amid the current AI boom, it's also the largest online retailer in the world. And that retail business is becoming increasingly profitable, ensuring it still accounts for around 40% to 45% of operating income despite the rapid growth of AWS.
Two of the biggest factors improving profitability for the retail business are Amazon's Prime subscriptions and its logistics operations. Amazon's subscription services revenue, which mostly consists of Prime memberships, consistently grows about 10% per year. That's not slowing down as management continues to increase the benefits of being a Prime subscriber, including the addition of premium content to its streaming service, its partnership with Grubhub, and more. Despite the growing list of benefits, Amazon's able to more than offset the costs through the subscription price and increased revenue in other parts of the business used by Prime members.
On top of that, Amazon's logistics overhaul and AI-powered inventory management has helped lower the cost of fulfilling orders while increasing delivery speeds, making Prime membership even more attractive and profitable. Amazon saw paid units increase 12% in the second quarter, but shipping costs only increased 6%. That's benefited the operating margin for its retail business.
But the biggest impact on Amazon's operating margin for its retail operations stems from its growing advertising business. Although Amazon advertising is closely tied to its retail business, it now extends well beyond it, including video ads on streaming services. Advertising revenue accelerated in the second quarter, climbing 22% year over year. And since it's such high-margin revenue, it lifted Amazon's overall North American operating margin to 7.5%, up 190 basis points from last year.
These trends should continue to benefit Amazon's profitability while AWS growth remains the driving force for operating income.
The path to $3 trillion
Amazon's biggest financial focus has always been long-term free-cash-flow growth. The massive AI buildout has been a major damper on that metric. But Amazon should start to see rapid improvements in free cash flow as AWS spending normalizes and the retail business continues to increase its operating margin.
It's not unreasonable for Amazon stock to trade for a 2% free-cash-flow yield, given the company's focus on constantly growing the amount of cash it generates. For it to reach a $3 trillion valuation, it would need to generate $60 billion in free cash flow in 2027. That might sound like a big ask for a company that managed less than a third of that amount over the past year, but it's doable. Remember, Amazon generated $53 billion in 12 months between 2023 and 2024. Steady operating-cash-flow growth and limited growth in capital expenditures could push Amazon close to $60 billion in annual free cash flow.
But investors may be willing to stretch that multiple significantly if Amazon shows strong AI demand pushing revenue and margins higher for AWS, leading management to spend more on data centers in the near term. With a current market cap around $2.3 trillion, $3 trillion looks within reach for Amazon in the next couple of years.
