After smashing earnings estimates last month on the back of better than expected results from Amazon Web Services — and posting its most profitable quarter ever — the news kept on rolling in this week. Amazon is going head to head with Google’s YouTube with Amazon Video Direct. And Amazon’s AWS just inked a deal with read more Salesforce.com (CRM). Salesforce will build its Internet of Things cloud software to run in AWS.
AWS really is the big story here. Amazon’s “Walmart of the web” retail business has never been a high margin business and probably never will be. But AWS is. It’s Amazon’s most profitable business and also its fastest growing. Amazon’s total sales grew at a 28% clip. But AWS grew at a 64% growth rate and now make up 9% of total sales. As AWS grows into a larger piece of Amazon’s business, Amazon’s margins should improve.
That said, where does Amazon go from here? There has been talk that Amazon might beat Apple and Google to the punch and become the first trillion-dollar company by market cap. One gentleman even went on the record as saying Amazon would be a $3 trillion company by 2025.
But are these realistic numbers?
Today, Amazon is worth a little over $300 billion. Making it to a trillion-dollar market cap would mean more than tripling from here, and a three-trillion-dollar market cap would mean that Amazon stock rose by a factor of 10.
That MIGHT be possible. But with Amazon’s current valuation in nosebleed territory, that’s pretty ambitious. It essentially implies that Amazon will maintain a 28% compound annual growth rate for the next 9 years AND have no valuation multiple compression. I’m not saying that’s impossible. But is it likely? I wouldn’t bet on it.
All of that said, where does Amazon go from here? With few competing growth stories to get investors’ attention right now, I would expect Amazon to continue drifting higher. $800 by year end is realistic barring a major market correction. And Amazon might very well be the first trillion-dollar company at some point in the next 2-3 years.
Amazon looks expensive based on earnings with a trailing P/E ratio of over 500. But using the price/sales ratio, you could argue that Amazon is not unreasonably priced. Amazon trades for about 3 times sales. If Amazon is a retailer, that’s expensive. safest canadian online pharmacy Walmart (WMT) and Target (TGT) barely fetch 1/6 of that valuation. But if you compare Amazon to tech companies like Microsoft (MSFT) or Google (GOOGL), which trade for 4-6 times sales, Amazon looks downright cheap.
Charles Sizemore is the principal of Sizemore Capital, a wealth management firm in Dallas, Texas. As of this writing he had no position in any security mentioned in this article.