Six American companies have a valuation of at least $1 trillion, and all of them operate in the technology industry. So far, five of them have graduated into the $2 trillion club or higher:
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Microsoft is valued at $3.3 trillion.
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Apple is valued at $3.2 trillion.
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Nvidia is valued at $3 trillion.
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Alphabet is valued at $2.3 trillion.
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Amazon (NASDAQ: AMZN) is valued at $2 trillion.
Amazon is the newest member, having crossed the $2 trillion threshold last week for the first time. The company generates more revenue than all of its peers on the above list, but that hasn’t translated into a higher valuation because of its relatively modest profitability. Amazon’s e-commerce business, for example, operates on razor-thin margins.
But the company is making changes that are driving substantial progress at the bottom line. Combined with its growing presence in artificial intelligence (AI), investors are clearly paying attention. Here’s why $2 trillion probably won’t be a stopping point for Amazon.
Amazon is in its AI era
Amazon was founded as an e-commerce company, and online sales are still its largest source of revenue. However, investors are keenly focused on its other businesses like streaming, digital advertising, and especially cloud computing. Amazon Web Services (AWS) is the world’s largest cloud platform, and it’s preparing to dominate the three core layers of AI.
At the bottom layer, AWS designed its own chips for both training and inferencing AI models, and they are growing in popularity because they can be up to 50% cheaper to use than some of its other infrastructure, which is powered by Nvidia’s industry-leading hardware. Plus, they help AWS ease supply constraints other data center operators like Oracle (NYSE: ORCL) are grappling with.
Large language models (LLMs) make up the second layer. The AWS Bedrock platform offers developers an entire portfolio of ready-made LLMs they can use to accelerate the buildout of customer-facing applications like chatbots and virtual assistants. That portfolio includes a family of LLMs designed by Amazon itself, called Titan, in addition to LLMs from leading AI start-ups like Anthropic.
The application layer is third, and it includes completed AI software that is ready for integration into almost any business. The new Amazon Q virtual assistant is a good example, because it can analyze high volumes of data to identify potential revenue opportunities, and it can also analyze, debug, and write computer code to accelerate software development.
But Amazon’s use of AI also extends to its legacy e-commerce business. It powers the recommendation engine on amazon.com to show customers products they are likely to buy, and the company also developed a suite of AI tools to help sellers craft more engaging product pages to boost sales.
Amazon generates more revenue than each of its peers
Amazon has generated $590 billion in trailing-12-month revenue, which is far more than any of its peers in the $2 trillion club:
However, Amazon’s price-to-sales (P/S) ratio — which is calculated by dividing its valuation by its revenue — is the cheapest of the bunch:
Simply put, investors haven’t given Amazon full credit for both sides of its business. In the recent first quarter of 2024 (ended March 31), the AWS cloud platform contributed 61.5% of the company’s entire operating profit despite accounting for just 17.5% of its total revenue.
Its e-commerce segment, on the other hand, has inflated revenue but often generates operating losses because Amazon charges low prices in order to sell a high volume of products. But the company is making efforts to improve profitability in that segment. Last year, it split its U.S. national fulfillment network into eight regions, so certain geographic locations can stock higher levels of inventory for the most popular products. This means products travel a shorter distance to reach customers, which reduces logistics costs.
By the end of 2023, Amazon’s cost to serve (the cost of fulfilling orders) on a per-unit basis shrank globally for the first time since 2018. Plus, during Q1 this year, almost 60% of Prime members in Amazon’s top 60 largest metro areas received their orders on the same day or the next day. Amazon CEO Andy Jassy says faster deliveries are prompting customers to order more frequently and spend more money, which is great for both revenue and profitability.
Strong contributions from both AWS and the e-commerce business sent Amazon’s net income soaring to $10.4 billion in Q1 2024, an increase of 225% from the year-ago period. That’s a key reason investors have piled into its stock lately.
$2 trillion probably won’t be a stopping point for Amazon
Based on Amazon’s trailing-12-month earnings per share of $3.57, its stock trades at a price-to-earnings (P/E) ratio of 54.1. The average P/E ratio of the other four stocks in the $2 trillion club is 42.9, which is why Amazon was so late to earn its membership despite its towering revenue (it looks expensive by comparison).
However, improving profitability will clear the way for Amazon stock to move higher. Wall Street expects the company to deliver $5.41 per share in earnings during 2025, which places its stock at a forward P/E ratio of 35.7. In other words, its stock would have to rise 20% by the end of next year just to trade in line with the current average P/E ratio of the rest of the $2 trillion club.
AI could add further fuel to Amazon’s results. The company recently invested $4 billion in Anthropic, and as part of the deal, the start-up is making AWS its primary cloud provider. It also committed to using Amazon’s chips to train its future models, which could entice other leading developers to try them. Finally, it will make those models available on AWS for customers to use, which could help the cloud platform win customers who might have selected competitors like Microsoft Azure instead.
In summary, investors with a time horizon of at least two years are getting a great deal on Amazon stock today, even though it recently set a new record high. But investors who set their sights on the longer term could earn greater rewards as AI unlocks more opportunities for the company.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Microsoft, Nvidia, and Oracle. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
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