Amazon (AMZN -1.45%) is the fourth-largest company on the stock market by market capitalization, but it's way behind the top three -- Apple, Nvidia, and Microsoft, which have all traded the top spot over the past year and are all worth more than $3 trillion. Amazon's market cap is closer to $2 trillion, quite a wide gap.
But could that be changing? Amazon has incredible opportunities in artificial intelligence (AI), and its stock is up 35% this year, outdoing its larger peers, except for Nvidia. Wall Street overwhelmingly sees Amazon stock as a buy, and one Wall Street analyst thinks it's going to $285 over the next year or so.
That's 39% higher than its price today, and it would push Amazon's market cap to just about $3 trillion. Let's see how that could happen.
AI and much more
Do you remember when Amazon was a bookseller? It still has a large book business, with its Kindle e-reader devices and content, but bookselling has turned into everything-selling, and Amazon is the largest e-commerce company in the U.S. by far, handling almost 40% of total e-commerce sales.
That might be enough of a reason to be confident in Amazon's future. E-commerce is still growing as a percentage of total retail sales, and Amazon benefits from that organic growth. It has an unmatched logistics network, and it leverages its superior capabilities to create an even better system, thus ensuring an upward cycle that no competitor would be able to challenge in the near future.
It made major changes to the outbound portion of its distribution network over the past two years, and now it's working on the inbound portion, where it's already seeing a strong uptick in productivity. It just rolled out its newest processing plant with the latest robotics technology, and it's demonstrating a 25% improvement in processing times that's also expected to result in 25% cost savings.
But Amazon is a lot more than e-commerce, and today it's getting a lot of attention for its generative AI solutions. Amazon has used AI and machine learning across its business for years, adding value to features like accurate product recommendations and delivery services.
However, most of the the generative AI is being pitched to Amazon Web Services' cloud computing clients. It provides tremendous value for clients at every level, from companies building their own foundation models through companies that can use Amazon's models to generate marketing campaigns and use Amazon's AI insights in their businesses.
The advertising business continues to enjoy strong momentum, and sales increased 19% year over year in the third quarter. Advertisers are expanding their budgets again after scaling down due to inflation, and Amazon is just unlocking the opportunities in video advertising on its ad-supported streaming platform. Plus there's progress in streaming, pharmacy, and more.
Can Amazon stock reach $3 trillion?
Today, Amazon stock trades at a price-to-sales ratio of 3.5 and a price-to-earnings ratio of 44. It has $620 billion in trailing-12-month sales, and $50 billion in trailing-12-month net income. Keeping those ratios constant, Amazon would need to grow its sales to $850 billion and net income $68 billion to reach a market cap of $3 trillion.
Are either of those feats possible within the next year or so? Sales reaching $850 billion doesn't seem doable in the next 12 to 18 months. It implies a sales increase of 37%, and sales growth has been around 11% in recent quarters. It did demonstrate that kind of growth during the height of the pandemic, but it isn't likely to be repeated in the coming months. However, it could still reach $3 trillion with a higher price-to-sales ratio.
As for earnings, net income would need to increase 36%, and that seems more doable. Amazon's net income has been volatile in some recent quarters because it takes into account vast changes in taxes, and management measures its profitability in operating income changes. Amazon's price-to-earnings ratio is lower than historical averages right now, and it may have more room to move up without creating an unreasonable valuation.
It's possible for Amazon to reach $3 trillion over the next 12 to 18 months, and even if it doesn't, it's likely to gain value for investors over that period and long term.
