This year already saw two new companies' market caps surpass $2 trillion, and a third is poised to hit that milestone.
The current members of the $2 trillion club are some of the most well-respected names in their fields, and all of their businesses revolve around technology.
- Microsoft ($3 trillion) established itself as an AI leader with a smart investment in OpenAI. Its Azure cloud computing platform and enterprise software business reap the benefits.
- Apple ($2.8 trillion) sells the iPhone and operates a growing services ecosystem built around its devices.
- Nvidia ($2.2 trillion) sits at the forefront of the AI trend as a supplier of the most sought-after chips for large language model training.
- Alphabet ($2.1 trillion) owns the most popular search engine, Google, operating a massive advertising business, and one of the biggest cloud computing platforms in the market.
The next company likely to join them also heavily invested in tech, including cloud computing and digital advertising. But its core business, retail, also shows a ton of potential for earnings growth. That company is Amazon (AMZN -1.61%).
Image source: Getty Images.
Trends driving Amazon to $2 trillion
Three important pieces of Amazon's business are benefiting from various trends. But investors shouldn't discount the operational excellence that Amazon's management team exhibited to take advantage of those trends.
Amazon is a key player in the booming AI trend. As demand for generative AI capabilities expands, cloud computing segment Amazon Web Services (AWS) is building out its capabilities to meet that demand.
CEO Andy Jassy says he likes to think of AI development in three layers. At the base layer, Amazon offers developers compute instances powered by Nvidia GPUs and its own custom Trainium 2 chips. It also offers a service, SageMaker, that makes training a large language model easier by managing customer training data. In the middle layer, it offers Amazon Bedrock for anyone looking to build on top of existing large language models. Developers can expand on existing models and build custom AI apps using Bedrock's tool set. At the top layer are existing AI-powered applications running on the cloud.
All three layers have contributed to the reacceleration of Amazon Web Services' revenue growth. The segment's revenue run rate surpassed $100 million in the first quarter.
The second trend is digital advertising. Despite how prevalent digital advertising is these days, it remains an opportunity for Amazon. The company saw great success with its sponsored product listings. In January, it started including video ads in Prime Video by default, adding another opportunity for sales growth. That said, management still says it thinks there are growth opportunities in its core display ad business.
Its advertising revenue climbed 24% year over year last quarter, and exceeded $49 billion over the trailing 12 months.
Amazon's original business, online retail, remains a big opportunity. Despite relatively slow growth for online store sales, third-party seller services, and subscription services (which mostly consists of Prime memberships), the real story is its expanding operating margin. North American operating margin climbed to 5.8% from 1.2% a year ago. That margin expansion was fueled by more efficient shipping operations as Amazon overhauled its logistics network. International operating income turned positive in the first quarter, a major milestone for the company.
Small improvements in operating margin go a long way when a business generates $500 billion per year in revenue.
Amazon's path to a $2 trillion market cap
As of this writing, Amazon's market cap sits just shy of $2 trillion. The stock needs to gain just 3% for the company to reach that milestone, and that could happen any day. Given the significant trends lifting its business and its operational successes, it shouldn't take long for the market to push it over the top.
That's especially true considering that the stock trades at a fair valuation. Its enterprise-value-to-sales ratio is 3.2, and analysts on average expect 11% sales growth both this year and next year. But with the expanding operating margin, it should produce earnings and free cash flow growth that far exceeds its revenue growth. And its price-to-free-cash-flow ratio of about 40 looks downright cheap compared to Amazon's historic levels.
At its current price, Amazon has an opportunity to surpass a $2 trillion valuation and never look back.
