Amazon (AMZN 1.01%) is best known for its e-commerce marketplace and Prime subscription service. While online shopping and fast shipping are indeed two of Amazon's major pillars, the company has been quietly building new opportunities in the area of artificial intelligence (AI).
Let's explore what investments Amazon has made in AI over the last couple of years, and how they are reaping dividends for the company's growth. From there, I'll break down why AI is such a meaningful tailwind for the company and explain why I think Amazon is headed for a $5 trillion valuation over the next five years.
NASDAQ: AMZN
Key Data Points
What are Amazon's AI-driven catalysts?
Amazon has been investing aggressively in several different areas of AI. Chief among them is that the company has plowed a whopping $8 billion into generative AI start-up Anthropic. Anthropic is now an integral part of Amazon's cloud infrastructure business, Amazon Web Services (AWS) -- spurring a new period of accelerating revenue and operating margins.
On top of that, Amazon has also been designing its own custom silicon chips -- dubbed Trainium and Inferentia. In theory, by using its own custom tech stack and moving away from a reliance on outside GPUs from Nvidia or Advanced Micro Devices, Amazon has the ability to enter new markets and generate significant cost synergies in the long run.
Lastly, Amazon is also leading the charge in AI robotics -- outfitting many of its fulfillment centers with machines that are able to automate human-driven processes. This is yet another way Amazon is positioning itself to yield greater returns on its AI investments by making core parts of the business more efficient.
Image source: Getty Images.
Analyzing Amazon's valuation trends
Amazon and Anthropic initially announced their partnership on Sept. 25, 2023. Since that announcement, Amazon has added nearly $1 trillion in market capitalization (as of May 19). Admittedly, an increase of this magnitude in such a short time frame may suggest shares of Amazon are due for a pullback. While I wouldn't rule that out, I think the longer-term picture for Amazon remains bullish.
AMZN Market Cap data by YCharts
During Amazon's first-quarter earnings call earlier this month, CEO Andy Jassy told investors that the company's "AI business right now is a multibillion-dollar annual run rate business that's growing triple-digit percentages year over year." He followed that up by saying, "as fast as we actually put the capacity in, it's being consumed."
Jassy is essentially saying that demand for Amazon's AI services is so high that the company needs to quickly reinvest back into these operations in order to fulfill customer needs. These supply-demand dynamics aren't going to be solved in one quarter, but they are very good problems to have. The big picture is that customers can't get enough of Amazon's AI ecosystem, suggesting the business is in a strong position to scale over the coming years.
What would it take for Amazon to reach a $5 trillion valuation by 2030?
The chart illustrates Wall Street's consensus revenue estimates for Amazon over the next couple of years. Between now and 2027, analysts expect Amazon to maintain 10% annual revenue growth. If I assume this rate does not change, Amazon would be on pace to generate $1.1 trillion in sales by 2030.
AMZN Revenue Estimates for Current Fiscal Year data by YCharts
As of this writing, Amazon's price-to-sales (P/S) ratio is 3.4 -- much lower than many of its "Magnificent Seven" peers. If Amazon maintains this P/S multiple, the company would be trading for a market cap of roughly $3.8 trillion by 2030. In order to reach a $5 trillion valuation, Amazon's P/S would need to expand to roughly 4.5, assuming a 10% annual growth rate.
AMZN PS Ratio data by YCharts
The way I think about Amazon's valuation dynamics is that the company has already added nearly $1 trillion in value, despite AI being an incredibly nascent part of the business right now. Over the next five years, I think Amazon's AI-inspired investments will start to become more obvious -- seen through accelerating revenue across different areas of the business, widening operating margins, and robust free cash flow growth.
Should this come to fruition, I think Amazon could be in a position to witness either an increase in revenue above 10% annual growth, or an expansion in its multiples -- bringing it in line with other leading cloud and chip businesses such as Microsoft or Nvidia.
To me, Amazon has multiple avenues to achieve a $5 trillion valuation by 2030. I think the stock is trading at attractive levels right now, and long-term investors may want to consider scooping up shares and holding on tight.
