It’s amazing how much things can change in just twenty years. Twenty years ago the industrial and energy strong figures General Electric And ExxonMobil were the most valuable companies by market capitalization, valued at $319 billion and $283 billion respectively. Jump forward to 2024 and technology concerns are at the forefront.
Topping the list are three of the most recognizable tech companies in the world. Apple leads the pack with $3.4 trillion (at time of writing). Nvidia And Microsoft are close behind, with market capitalizations of $3.1 trillion and $3 trillion, respectively.
With a market cap of just $1.9 trillion, it might seem premature to suggest that Amazon (NASDAQ: AMZN) has all the trappings necessary for membership in the $3 trillion club. However, the stock is up 42% in the past year and 109% in the past five years, and the recovery appears to be continuing.
Recent improvements in the economy, the company’s strong market position and measured adoption of artificial intelligence (AI) could be the drivers needed to boost Amazon’s membership in this elite fraternity.
Improve performance
Recent years have been full of challenges, not least an economic downturn fueled by decades of high inflation. However, there has been a dramatic improvement in recent months, as consumer confidence reached a five-month high in September and the Federal Reserve Bank began its long-awaited campaign of interest rate cuts.
Improving economic conditions are having a positive impact on Amazon’s results. In the second quarter, net sales of $148 billion rose 10% year over year, while diluted earnings per share (EPS) of $1.26 nearly doubled.
Improvements in each of the company’s key operating segments contributed to the robust results. Online sales in the US increased 9%, while international sales increased 7%. Perhaps most significant was a renewed acceleration in Amazon Web Services (AWS) – the company’s cloud computing arm – which rose 19%, the highest growth rate since late 2022.
Equally important, advertising – the company’s fastest growing business – is up 20% as Amazon works to become a major player in the advertising world.
A market leader – in more ways than one
Amazon is the undisputed leader in e-commerce, an area it pioneered. The company accounted for 38% of US digital retail sales last year, more than the next 15 largest rivals combinedaccording to data collected by eMarketer. That dominance is expected to continue into 2024, with the company expected to capture 40% of online sales in the US this year.
The company has long used AI to maintain a competitive advantage over its rivals. Amazon uses AI to make product recommendations to customers and to predict and maintain adequate inventory levels in its distribution centers and warehouses. The company also uses AI-powered robots to stock shelves and pick goods for shipment, deploying these advanced algorithms to determine the most efficient delivery routes.
Amazon is also the leader in cloud computing, another company it pioneered. Amazon Web Services (AWS) is the largest provider of cloud infrastructure services, with 33% of the market in the second quarter, with Microsoft Azure at number 2 and Alphabet‘s Google Cloud is at number 3, with 20% and 10% of the market respectively, according to research firm Canalys. Amazon offers one of the largest repositories of AI models for its cloud customers, which has helped accelerate cloud growth again.
Last, but certainly not least, is Amazon’s digital advertising business. The company runs ads on its e-commerce website, Prime Video, Freevee, Amazon Music streaming services, its Twitch video game streaming platform and more. The company uses AI to ensure that the advertisements reach the target market. The results are undeniable, as advertising has been Amazon’s fastest growing business for years in a row.
The road to $3 trillion
Amazon currently has a market cap of about $1.9 trillion, meaning it would need a share price gain of about 57% to take its value to $3 trillion. According to Wall Street, Amazon is expected to generate revenues of $635 billion by 2024, giving it a price-to-sales ratio (P/S) of roughly 3. Assuming P/S remains constant, Amazon should grow its revenue. sales to approximately $998 billion per year to support a market cap of $3 trillion.
Wall Street currently predicts sales growth for Amazon of 11% per year over the next five years. If the company hits that benchmark, then it is could reaching a market capitalization of $3 trillion as early as 2029. It’s worth noting that Amazon has grown its annual revenue nearly 400% over the past decade, so those expectations could be conservative.
Furthermore, Amazon currently sells for about 3.2 times sales, a slight discount compared to the average of more than 3.3 times over the past five years. That’s a pretty attractive price for a company with so many ways to win.
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*Stock Advisor returns October 7, 2024
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Danny Vena has positions at Alphabet, Amazon, Apple, Microsoft and Nvidia. The Motley Fool holds positions in and recommends Alphabet, Amazon, Apple, Microsoft and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
Meet the unstoppable growth stocks that could join Apple, Nvidia and Microsoft in the $3 trillion Club by 2029, originally published by The Motley Fool
