Amazon’s Path to $10 Trillion Market Cap Outshines Competitors

Investors have long favored Apple, which was once the largest company in the world by market capitalization, largely due to the iPhone’s success. However, Apple is now facing challenges as competitors like Microsoft and Nvidia emerge with faster revenue growth. While these companies are viable candidates to reach a $10 trillion market cap, I believe another tech giant, Amazon (NASDAQ: AMZN), will achieve this milestone first.

Amazon‘s impressive growth engines and profitable margin expansion position it as a frontrunner in reaching a $10 trillion valuation.

Image source: Getty Images.

Multiple Engines of Growth

Amazon’s strength lies in its significant presence in both e-commerce and cloud computing, two sectors valued at hundreds of billions of dollars that are expected to evolve into multitrillion-dollar markets.

Currently, e-commerce accounts for less than 20% of retail sales in the United States. This percentage has steadily increased over the years, and this growth trend is unlikely to reverse anytime soon.

In the past 12 months, Amazon’s total sales from North America and international markets exceeded $500 billion. Considering the ongoing adoption of e-commerce, potential global GDP growth, and inflationary pressures, I project that these segments could double, exceeding $1 trillion in revenue with ample room for further growth.

Moreover, cloud computing is being revolutionized by artificial intelligence (AI), broadening the industry’s initially estimated $1 trillion addressable market. Amazon’s cloud division, Amazon Web Services (AWS), is set to utilize a significant share of the company’s anticipated $100 billion in capital expenditures in 2025.

Currently, AWS generates $112 billion in revenue, growing at a rate of 17% year over year. I believe there is a clear trajectory for AWS to eventually reach $200 billion and potentially $300 billion within the next decade.

Better Margin Expansion Potential Compared to Other Tech Giants

Amazon stands out among major tech companies mainly because of its substantial margin expansion potential. Over the last year, Amazon’s operating margin sat at 11%, in stark contrast to Microsoft’s 45%. Although it is unlikely that Amazon will achieve a 45% profit margin, there is significantly more room for growth in its business model in comparison to its cloud computing competitors.

AWS, which maintains an operating margin close to 40%, is becoming an increasingly vital component of Amazon’s revenue. In addition, advertising, third-party seller services, and subscriptions are rapidly expanding in Amazon’s retail sector. These high-margin segments are expected to enhance Amazon’s profitability over the next 10 to 20 years, leading to an anticipated operating margin exceeding 20% in the long term.

AMZN Operating Margin (TTM) data by YCharts

The Road to a $10 Trillion Market Cap for Amazon

Whether it takes 10, 15, or 20 years, I anticipate Amazon’s combined revenue will ultimately hit $2 trillion. Its competitors in big tech lack the extensive addressable market that Amazon captures by dominating both the e-commerce and cloud computing sectors, which may restrict their revenue growth in the coming one to two decades. Advancements in AI are expected to further accelerate growth in cloud computing.

Achieving $2 trillion in revenue with a 20% operating margin results in $400 billion in operating earnings. A $10 trillion market cap corresponding with $400 billion in earnings produces a reasonable earnings ratio of 25.

Compared to its counterparts in technology, Amazon has a clearer path to substantial revenue growth, putting it in a favorable position to achieve the necessary hundreds of billions of dollars in annual earnings to justify this valuation. It may require over a decade, but I believe Amazon Stock will be the first to reach a $10 trillion market value.

Conclusion

As the tech landscape evolves, many investors may feel they’ve missed opportunities with successful stocks. However, Amazon’s growth potential remains promising.

Investing in Amazon before significant milestones could be a wise choice, especially in light of its strong operational strategy and market outlook.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Brett Schafer has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Apple, Microsoft, and Nvidia.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.