There's a growing expectation that Elon Musk will eventually combine all his businesses under a single entity.
Earlier this year, he oversaw the merger of SpaceX and xAI, the latter of which had previously acquired his social media company, X (formerly Twitter). The next step of combining SpaceX and Tesla (TSLA +8.49%) may be a bit more difficult, but it's still well within reason. Musk further strengthened the tie between the two companies earlier this year with the launch of their Terafab joint venture, which aims to make custom chips for both companies' artificial intelligence (AI) endeavors.
Despite the sprawling business empire Musk has built, one company finds itself with a significant number of operations that go head-to-head with Tesla or SpaceX. And it could be worth more than both companies combined by next year. Here's why Amazon (AMZN +3.23%) should be on your radar.
Image source: Getty Images.
Can Amazon top $3 trillion?
SpaceX is set to make its public debut at a valuation of $1.75 trillion. Tesla's market cap is around $1.6 trillion. That means Amazon will have to top $3 trillion to outweigh the combined heft of the two competitors.
To be sure, Amazon is already within spitting distance of $3 trillion, with a market cap of $2.85 trillion at this writing. Still, the stock looks undervalued based solely on its core businesses of retail and cloud computing. And it has potential upside in business endeavors in satellite internet and robotaxis, where it directly competes with SpaceX and Tesla.
In retail, the company is producing solid double-digit revenue growth, but the real story is its expanding operating margin. There are three key drivers of its operating margin. Amazon's improved logistics network is driving down shipping costs. Amazon's new stand-alone logistics service could continue to drive down cost-per-unit thanks to scale advantages. Additionally, high-margin Prime subscription and advertising revenue continue to outpace retail sales.
NASDAQ: AMZN
Key Data Points
Meanwhile, Amazon's cloud computing business, Amazon Web Services (AWS), has seen revenue growth accelerate in each of the last three quarters. Accelerating revenue is closely tied to its growing capital expenditure (capex) budget. With another big step up in spending this year, that revenue acceleration should continue.
AWS is the largest cloud computing platform in the world, but SpaceX could present a significant competitor. Its initial public offering (IPO) filings revealed Anthropic agreed to pay $1.25 billion per month for access to its Colossus data centers over the next three years, and it expects to sign similar deals in the future. But AWS can produce much better profits than SpaceX thanks to its scale and its custom chips.
During Amazon's first-quarter earnings call, CEO Andy Jassy said the majority of AI accelerators coming into its data centers are its custom Trainium chips. He noted that using its own chips will provide several hundred basis points of operating-margin improvement for AWS.
The retail and cloud computing businesses are firing on all cylinders and should produce substantial operating profit growth for the foreseeable future, pushing Amazon's valuation higher. And Amazon's satellite internet service and robotaxis could add substantial upside. In fact, both SpaceX and Tesla derive the vast majority of their valuations from those two businesses.
Are SpaceX and Tesla overvalued?
Both of Musk's companies are valued based on their potential earnings rather than their current financial results.
That means making many guesses about how big their addressable markets will be, what percentage of the market they can capture, and what competitive pressures will affect their operating margins. There's no shortage of optimism around either Tesla or SpaceX.
Valuation expert Aswath Damodaran estimates SpaceX's intrinsic value is about $1.2 trillion. That's based on its profitable Starlink business growing to a $120 billion operation in 10 years. He also sees xAI carving out a niche, launch services to improve its profitability, and expansion into another potential business.
Starlink has the most promising path to reach Damodaran's outlook. It would still need to grow revenue over 25% per year over the next decade, though, and Amazon's Leo presents an interesting challenger to get there. While Amazon has struggled to get Leo off the ground (pun intended), it's starting to pick up momentum. And with Starlink only starting to tap into the market's potential, there's still plenty of time to compete. That could ultimately put pressure on its profit margin.
After the IPO hype dies off and the lockup period expires, it wouldn't be a surprise to see SpaceX valued lower in 2027.
NASDAQ: TSLA
Key Data Points
Meanwhile, Tesla's valuation is primarily tied to the potential of its robotaxi and robotics businesses. Its current price-to-earnings (P/E) ratio of 204 suggests investors aren't particularly concerned about profits from its automotive business. But Tesla faces a tough battle in the robotaxi market. It's behind its biggest competitor, Waymo, and it plans to operate its own fleet of robotaxis while enabling existing Tesla owners to add their vehicles to the fleet later. That comes with significant risk as Tesla takes on competing robotaxi services and legacy rideshare platforms.
Amazon is partnering with Uber for its Zoox self-driving cars. It's a strategy Waymo and dozens of other self-driving car companies have taken as well. That's because Uber is the leading demand aggregator for ride-sharing and can improve fleet utilization and maximize returns on capital for its partners. It's worth noting that Amazon has a secondary path to scale Zoox by using cars for delivery as part of its retail and logistics operations.
The uncertainty of its future business growth makes it tough to buy into Tesla at its current valuation. And it, too, could trade lower in 2027.
