Three stocks have now reached market capitalizations of $3 trillion: Apple, Microsoft, and most recently Nvidia. Earnings growth across the technology sector has been phenomenal in the last decade-plus, leading investors to get increasingly enthusiastic about these stocks. Most recently, innovations in artificial intelligence (AI) have further spurred on these shareholder gains.
Investors have seen stocks continuously surpass trillion-dollar market cap thresholds. But what about $10 trillion? I think there is one stock primed to achieve this milestone before anyone else, and it isn't one of the three companies mentioned above.
Amazon (AMZN -1.45%) can be the first stock to reach a market cap of $10 trillion and will be the most valuable company in the world once again. Here's why.
E-commerce profits coming from an unlikely source
For years, investors doubted the profitability of Amazon's e-commerce operations. With thousands of warehouse workers and delivery drivers, there are a lot of costs associated with running a vertically integrated online marketplace. The core e-commerce business model has razor-thin margins, which will never change. However, the company has layered in highly profitable business lines on top of the e-commerce marketplace.
First, the company has its long-standing Amazon Prime subscription business. Subscription revenue was $43 billion over the last 12 months, up from a measly $2.76 billion in 2014. Amazon has the ability to let these profits fall to the bottom line if it decides to stop reinvesting for growth.
Second, Amazon is now generating $54 billion in annual advertising revenue, mainly from sponsored listings on its e-commerce platform. This is high-margin revenue that can fall directly to the bottom line, just like the subscription business.
Add the two together, and you have close to $100 billion in earnings potential even if you believe the core e-commerce, third-party sellers, and physical retail locations will never generate a lick of earnings.
Why use these estimates? To show the profit potential of Amazon's global retail business lines. These segments have the potential to generate close to $100 billion in earnings in the near future. If revenue keeps growing at a double-digit rate, segment earnings could expand to $150 billion or even $200 billion within the next 10 years.
A standing advantage in cloud and AI
Amazon's most profitable business line is Amazon Web Services (AWS). The leading cloud computing giant generates around $100 billion in revenue and $36 billion in earnings, or a profit margin of 36%. That makes it one of the most profitable businesses in the world, and it is just a subsidiary of the Amazon complex.
Cloud computing revenue is only growing, and is now supercharged by AI spending. AWS seems to be positioned well to take advantage of this trend, and is even investing in its own computer chips to take some of the huge costs it pays to companies like Nvidia every year. Analysts estimate cloud computing spend will grow at a 22% annual clip from 2024 through 2030, supercharged by AI.
Assuming AWS can maintain its profit margins and market share, six years of 22% earnings growth would mean AWS is generating more than $100 billion in earnings in 2030. An ambitious estimate, but one that is achievable if the AI boom is for real, which it increasingly looks like it is.
AMZN Operating Margin (TTM) data by YCharts
Running the math to $10 trillion
Combining all its segments together, it looks like Amazon has the potential to generate around $300 billion in earnings in 2030. This figure could even be surpassed if its new projects in healthcare, pharmacy, and satellite internet with Project Kuiper bear any fruit. Regardless, the company has a ton of momentum that should only continue over the next five years.
A $10 trillion market cap on $300 billion in annual earnings is a price-to-earnings ratio (P/E) of 33. While that's a premium earnings multiple, I don't think it is unreasonable that Amazon would trade at this valuation. For reference, Apple and Microsoft both trade at earnings ratios above 33 right now.
With multiple tailwinds at its back and rapidly expanding profit margins (operating margin has surged to a record 10% over the last 12 months), Amazon is poised to be the first company with a $10 trillion market cap.
