Amazon Echo, the e-commerce giant's smart speaker. Image source: Amazon.
Over the last 12 months, Amazon (AMZN +0.15%) has been one of the market's best-performing stocks. Shares of the e-commerce giant have risen nearly 65% since last May on a series of strong earnings reports.
But Amazon is only getting started according to venture capitalist Chamath Palihapitiya. Earlier this month, the head of Social Capital argued that Amazon could be worth as much as $3 trillion within 10 years. If Palihapitiya is right, shares could rise 900% from current levels (Amazon's market cap stands at around $333 billion).
An early stage investor
Palihapitiya's business success is notable, but he doesn't have much of a track record as a stock picker. After successful stints at AOL and Facebook, Palihapitiya founded Social Capital, where he's invested in numerous successful start-ups. Social Capital's portfolio is composed of investments in about 50 different companies, including Slack, SurveyMonkey, and Wealthfront. But his interests may be changing. Palihapitiya pitched Amazon at the annual Ira Sohn investment conference, alongside hedge fund legends Jim Chanos, Stan Druckenmiller, and David Einhorn.
It's all about AWS
Palihapitiya characterized Amazon as a potential multi-trillion dollar monopoly with healthy margins. Amazon's net income has been meager or even negative for most of its history as a publicly traded company, but investors shouldn't think of Amazon as unprofitable, according to Palihapitiya. Rather, Amazon's management is harvesting the cash it generates and reinvesting it in its business.
Palihapitiya loves Amazon's core retail business, and believes it could eventually be worth $1 trillion. But he's even more optimistic about Amazon Web Services (AWS), Amazon's cloud computing platform. Palihapitiya thinks AWS could be worth $1.5 trillion over time. That would represent astronomical appreciation: Last fall, analysts at Deutsche Bank pegged AWS's value at around $160 billion. Palihapitiya views AWS as the next great computing monopoly, one that will dominate its space and devastate many of its competitors as it grows over time.
He expressed similar sentiments in a post made on Quora back in January. Then, Palihapitiya was even more bullish, arguing that Amazon was the "surest path to a $5 [trillion]...market cap within 50 years." In Palihapitiya's view, eventually almost all computing could be cloud-based, and most companies will choose to use AWS rather than build their own infrastructure. AWS's margins could be incredibly small, perhaps just 1%, but it wouldn't matter, because Amazon would essentially be leveling a tax on all of computing -- an enormous market of almost unfathomable size.
Buffett's mistake?
Palihapitiya's outlook would seem to contrast with other famed investors, and if he's right, it could mean a grim future for other companies operating in the space. Warren Buffett, for example, has been a longtime IBM (IBM +2.59%) shareholder. In an interview with CNBC last year, he argued for the company partially on the basis of its cloud computing business. Although he admitted that he knew little about cloud computing, Buffett argued that "cloud computing is not a winner-take-all-game." But if Palihapitiya is right, Buffett is almost certainly wrong.
AWS mostly operates a public cloud -- companies that use AWS rely on Amazon to provide and manage the hardware, security, and networking that powers their cloud computing capabilities. IBM, in contrast, mostly provides hybrid clouds -- cloud computing setups that blend an individual corporation's private servers with IBM's cloud computing services.
Right now, many companies prefer hybrid cloud setups, and for good reason: In theory, they're far more secure. They're also ideal for certain regulatory environments, as some governments place geographic restrictions on where data can be stored. But in time, Amazon's relentless pursuit of ever-lower prices could make hybrid cloud solutions economically untenable for all but the biggest companies, and geographic restrictions and security threats could be overcome.
To be fair, Amazon isn't the only company competing in the public cloud space, but it is the leader by a sizable margin. Last month, Amazon announced that that AWS was on track to do $10 billion in annual sales this year, a figure that would likely dwarf all of its competitors (most of whom don't regularly disclose their cloud revenue, at least not in a straightforward manner). That's up from $7.9 billion in 2015.
Will Amazon be worth $5 trillion 50 years from now? It's impossible to say, but to date, AWS's impressive growth has certainly rewarded Amazon shareholders.
