Shifting Sands on Wall Street: Could Amazon Become the First $5 Trillion Company?

The landscape of Wall Street is in constant flux due to innovation and various market forces like mergers, bankruptcies, and regulations. This shift affects how the largest publicly traded companies are ranked.

As 2004 ended, ExxonMobil held the title of the largest publicly traded company in the S&P 500, with Citigroup and General Electric also in the top 10. Fast forward to today, and only Microsoft (NASDAQ: MSFT) remains from that list among America’s largest companies.

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Since mid-2023, Apple (NASDAQ: AAPL), Microsoft, and the semiconductor giant Nvidia (NASDAQ: NVDA) have all surpassed the $3 trillion valuation mark. While Nvidia seems poised to reach the $5 trillion milestone because of its AI advancements, a surprising contender might actually lead the way.

Nvidia Faces Substantial Historical Challenges

There’s no doubt that Nvidia has experienced impressive operational growth. The company’s Hopper (H100) GPUs and upcoming Blackwell chips are highly sought after by businesses looking to implement generative AI solutions in their data centers.

With demand for GPUs far exceeding supply, Nvidia has been able to charge between $30,000 and $40,000 for its Hopper chip, a price four times higher than Advanced Micro Devices charges for its Instinct MI300X GPU. This strong pricing power helped Nvidia achieve a gross margin of 78.4% last year.

Despite the promising long-term outlook for AI, Nvidia’s path to becoming the first $5 trillion company is likely hindered by historical trends.

Approximately 30 years ago, the internet emerged, transforming business interactions dramatically. Although it ultimately benefited corporate America, it took time for companies to grasp how to effectively use this new tool.

Historically, every revolutionary technology has gone through a bubble phase, leading investors to overly optimistic timelines for their widespread adoption. Companies often lack clear strategies to maximize returns on AI investments, making the current AI excitement susceptible to similar bubbles.

Given Nvidia’s direct reliance on AI, its stock may bear the brunt of any downturn, making it unlikely to reach a $5 trillion valuation first.

Image source: Amazon.

Amazon: The Underdog with an Obvious Advantage

If the AI bubble bursts, it could spell trouble for Microsoft, which has made heavy investments in AI. Although Microsoft doesn’t rely on AI to the extent Nvidia does, reaching a $5 trillion valuation would still be challenging.

Similarly, Apple is facing its own hurdles. While its services segment is growing rapidly, sales of iPhones and other devices have stalled over the last two years. Currently trading at one of its highest valuations in a decade, Apple has little room left to increase its valuation by another $1.4 trillion.

In this scenario, the “Magnificent Seven” company with the clearest path to a $5 trillion valuation appears to be e-commerce leader Amazon (NASDAQ: AMZN).

Consumers often associate Amazon with its online marketplace, which eMarketer estimates will account for over 40% of U.S. online retail sales in 2024. However, its e-commerce operations generate minimal cash flow when compared to its other business segments.

The greatest potential for Amazon’s growth lies in its other operating divisions, particularly Amazon Web Services (AWS).

AWS holds the title of the world’s leading cloud service platform, boasting an estimated 33% share of total cloud spending in the third quarter of 2024, eclipsing platforms like Microsoft’s Azure and Alphabet‘s Google Cloud combined.

Despite AI contributing to AWS’s growth, cloud services were expanding steadily at a double-digit rate before AI captured Wall Street’s attention. With enterprise spending on cloud services still in its early growth stage, Amazon is poised for higher profit margins in this area.

In addition to AWS, Amazon’s advertising and subscription services are also seeing strong growth. Its recent initiatives in streaming exclusive sports events, like Thursday Night Football, are expected to further enhance advertising demand and boost subscription pricing.

The key takeaway is that Amazon won’t be as adversely affected by a potential AI bubble burst due to its diverse revenue drivers.

Moreover, Amazon’s shares are historically inexpensive. During the 2010s, investors readily paid between 23 and 37 times earnings to own a piece of the company. However, as of January 10, Amazon shares were only valued at 13.5 times earnings.