Amazon (AMZN +0.81%) stock soared 15% after it reported second quarter earnings. That's an impressive gain in one day, but I think that was just the beginning. The reality is that Amazon is a fantastic investment, and the news that it provided during its Q2 earnings shows that its plan is working.
As the infrastructure it's spending hundreds of billions of dollars on comes online, its revenue and profit will continue to accelerate, potentially transforming Amazon into one of the most dominant businesses in the artificial intelligence (AI) sector. This all adds up to a stock that could be one of the best investments to make right now, and I think investors should load up on more shares before it's too late.
Image source: The Motley Fool.
AWS could be a $1 trillion business
When most people hear the name Amazon, they immediately think of its commerce business. Although that's the consumer-facing side of its business, the real cash cow is Amazon Web Services (AWS), its cloud computing division. Despite making up just 21% of total sales, AWS contributed 60% of the profit. That showcases AWS' superior profit profile versus commerce, and it's only going to get better for Amazon.
AWS is growing at a rapidly accelerating pace, with sales rising 37% year over year and operating income increasing 64% year over year. For comparison, Amazon's North American and international divisions experienced revenue growth of 16% and 15%, respectively. AWS is growing much faster due to major investments, as there is a huge demand for its computing resources.
NASDAQ: AMZN
Key Data Points
AWS lets AI companies can rent out computing capacity to train and run AI models. There is a huge demand for this capacity, so Amazon is making $220 billion in data center capital expenditures this year. As this computing capacity in built out, AWS's revenue will soar. Furthermore, these clients need to pay for their computing usage continuously, so this is a recurring-revenue business model. Amazon Chief Executive Officer Andy Jassy is very bullish on this business and believes that it could generate $1 trillion of revenue someday. That would be an incredible business, and huge growth from the $148 billion AWS generated during the past 12 months.
But what does that mean for the stock?
A $1 trillion business would result in a huge division by itself
To understand what $1 trillion in revenue would mean for Amazon, we must split the business into two parts: cloud computing and commerce.
First, let's tackle the cloud computing business. Let's say Amazon can get to the $1 trillion revenue mark and maintain the 39% operating margin it delivered in Q2. That means this division would produce $391 billion in operating profit. For comparison, Apple and Nvidia, the two largest companies in the world valued at $4.5 trillion and $5 trillion, respectively, produced $155 billion and $162 billion in operating income during the past 12 months.
Amazon's projection is more than double those figures. That means AWS by itself could be worth well over $10 trillion, and that's not even factoring in the commerce business. If Amazon hits its goals, it could be a $15 trillion business in the future -- about 5 times its current value.
Because Amazon is investing heavily in its computing capabilities, don't be surprised to see this growth rate hold up or accelerate during the next few years. This will drive Amazon's stock to new highs, making now a perfect time to buy the shares, even after its post-earnings pop. If Amazon is truly heading to a $15 trillion market cap, nearly any price today is worth paying for the stock.
