|Source : Market Insider|
Table of Contents
- Amazon’s Path to $2 Trillion
- The AWS Growth Engine
- Ramping Up Profitability
- How Much Could Berkshire Profit?
- Expert Predictions
- Tips for Investing in Amazon
In the elite world of Wall Street, there are only two companies that have reached the rarified air of a $2 trillion market valuation — Apple and Microsoft. But many experts believe a third tech titan could soon join the ultra-exclusive club.
Amazon, the e-commerce behemoth founded by Jeff Bezos, has a legitimate shot at hitting the $2 trillion mark within the next few years according to seasoned investors like Warren Buffett. Berkshire Hathaway, Buffett’s holding company, owns a stake in Amazon currently worth around $3 billion.
So does the “Oracle of Omaha” see even bigger things ahead for Amazon stock? Let’s analyze the growth drivers that could propel Amazon into the $2 trillion stratosphere.
Amazon’s Path to $2 Trillion
With a market cap hovering around $1.4 trillion as of August 2023, Amazon would need to gain roughly 40% to reach a $2 trillion valuation. While that seems like a tall order, the company has several key factors working in its favor:
- Amazon Web Services (AWS), Amazon’s cloud services segment, is posting tremendous growth as artificial intelligence and machine learning drive demand. AWS revenue jumped 33% year-over-year in Q2 2023.
- Profitability is ramping up quickly. Amazon’s net income more than doubled quarter-over-quarter in Q2 2023, reaching $6.7 billion.
- Amazon has strong momentum in generative AI, which lets users create original content with simple text prompts. The company aims to be a top provider of generative AI tools.
- Amazon Prime membership continues growing globally, now reaching over 200 million members. This loyal customer base fuels massive recurring revenue.
With these tailwinds, analysts see Amazon hitting the $2 trillion milestone potentially within 2–3 years. It faces stiff competition from Microsoft Azure in cloud services however, along with an uncertain macroeconomic climate. But its diverse revenue streams and leadership in key growth areas make Amazon a frontrunner for the next $2 trillion club member.
The AWS Growth Engine
AWS is the primary profit driver that could catapult Amazon to a $2 trillion+ valuation. Cloud services offer subscription-based revenue that scales massively once customers are acquired.
Forrester Research expects the global public cloud market to reach $1.3 trillion by 2028. Amazon currently holds a 33% market share, dominating competitors like Microsoft Azure, Google Cloud, and Oracle Cloud. As more companies shift their data and applications to the cloud, AWS has an opportunity to expand its customer base.
The next major catalyst for AWS will likely be the rise of generative AI tools like ChatGPT. Amazon execs called out generative AI as a huge area of opportunity in recent earnings calls. The company is positioning AWS as the go-to cloud platform for companies deploying generative AI. With the segment still in its infancy, AWS revenue could skyrocket as demand takes off.
Ramping Up Profitability
For years, investors turned a blind eye to Amazon’s thin profit margins as revenue grew at a breakneck pace. But in recent quarters, Amazon has posted steadily rising profits — and shareholders are cheering.
In Q2 2023, Amazon’s net income surged to $6.7 billion — up from $3.1 billion in Q1. Rising profits are being driven by AWS growth, expanding third-party seller services, and optimizing fulfillment/logistics expenses.
If Amazon can sustain this momentum and steadily increase margins over the next few years, it will validate the stock’s premium valuation in the eyes of Wall Street. Profitability growth remains a crucial test Amazon must pass to claim its spot as the world’s third $2 trillion company.
How Much Could Berkshire Profit?
Legendary investor Warren Buffett has long been bullish on Amazon’s game-changing potential, even if he was slow to invest in the stock. Berkshire Hathaway’s current stake of 10.5 million shares was built up over several years through the efforts of Buffett’s investing lieutenants.
At Amazon’s current valuation, Berkshire’s shares are worth around $3 billion. If Amazon gained 40% to reach a $2 trillion market cap, Berkshire’s position would jump to roughly $4.2 billion.
While that $1.2 billion price appreciation would be a nice bonus, it’s a relatively small return for a conglomerate that currently holds over $300 billion in public stocks. This suggests that even if Buffett remains confident in Amazon’s trajectory, he may opt to significantly increase Berkshire’s stake to truly capitalize on the next wave of growth.
Industry analysts seem nearly unanimous that Amazon is on track to join Apple and Microsoft in the ultra-prestigious $2 trillion club. Here’s what some experts forecast for Amazon’s path ahead:
“AWS will continue to drive higher margins, and emerging technologies like generative AI could catalyze even faster cloud growth,” predicts Mark Mahaney of Evercore ISI, who sees Amazon hitting $2 trillion by 2025.
“Amazon’s proven ability to disrupt major industries still leaves a lot of runway for growth in retail, cloud services, digital media, and more,” says Andrew Bary of Barron’s, who estimates Amazon shares could rise 30% within a year.
“Between Prime subscriptions, AWS, and savvy investments in new technologies like self-driving vehicles, Amazon has a diverse mix of fast-growing businesses,” notes JPMorgan analyst Doug Anmuth, who gives Amazon shares an overweight rating.
Tips for Investing in Amazon
For investors intrigued by Amazon’s potential to join the $2 trillion valuation club, here are some smart strategies to consider:
- Don’t try to time your entry perfectly. Amazon volatility can create buying opportunities, but legging in over time helps manage risk.
- Take a long view. The path to $2 trillion likely won’t be straight up. Maintain a multi-year investment horizon.
- Diversify beyond FAANG stocks. Balance Amazon with holdings in other sectors so your portfolio avoids concentration risk.
- Utilize options collateral for added income. Selling covered calls or cash-secured puts can generate extra returns.
- Know your thesis and adjust accordingly. Stay on top of AWS competition, growth in Prime subscriptions, margin trajectory, and other metrics tied to your bull case.
Amazon still faces risks like cloud rivalry from Microsoft and slowing e-commerce demand if consumers pull back spending. But its leading positions in key markets make a $2 trillion milestone achievable for disciplined long-term shareholders.
Could Amazon really reach a $2 trillion valuation?
Yes, Amazon hitting a $2 trillion market cap within 2–5 years is feasible if growth drivers like AWS, Prime subscriptions, advertising, and emerging technologies continue gaining strong momentum. Continued profitability increases would also help justify the valuation.
What could prevent Amazon from reaching $2 trillion?
Major obstacles that could impede Amazon’s path include faster growth from rivals like Microsoft Azure in cloud services, Prime member growth stagnating, consumers cutting back e-commerce spending in a recession, and Amazon’s margin expansion stalling out.
Is Amazon stock a buy today?
Many analysts recommend buying Amazon at current levels, projecting robust growth ahead in cloud computing and continued gains in profitability. But dollar cost averaging may be prudent given economic uncertainty.
Is AWS really profitable enough to lift Amazon to $2 trillion?
AWS is by far Amazon’s most profitable segment, with operating margins ranging from 25% to 30%. If AWS can maintain rapid growth as demand for cloud services and AI computing ramps up, it can provide the earnings lift to justify a $2 trillion+ valuation.
Amazon reaching the rarefied $2 trillion market cap threshold won’t happen overnight. But the company has multiple levers to pull, from cloud computing leadership to margin expansion, that make the target achievable within a few years. Savvy investors like Buffett will be watching closely if Bezos can steer Amazon into one of the most elite clubs on Wall Street.
If you liked my work you can buy me a coffee