This company is seeing triple-digit growth in its AI services as demand continues to grow.
That’s a lot of spending to keep up with demand and growing as quickly as possible.
Its core business is efficient cost reduction while increasing high-margin revenue and increasing cash flow.
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The $3 trillion club is surprisingly crowded. After that Apple became a founding member, Microsoft and Nvidia has since gone further, and Nvidia’s value has grown to more than $4 trillion.
Last month, Alphabet has joined the party, but he’s hanging on the back foot near the entrance, with his market cap fluctuating up and down.
In the next two years, we’ll likely see at least one more company climb the ranks of the $3 trillion club. It’s good that the company will be closely tied to artificial intelligence (AI), as AI spending is expected to continue to grow through the end of the decade. But even if AI growth falters, this company is well-positioned to be in the $3 trillion club in the near future.
That’s why I’m making a prediction Amazon(NASDAQ: AMZN ) by 2027 will join the mega-weird elite.
Image source: Getty Images.
Amazon is a pioneer in Infrastructure as a Service with its Amazon Web Services business. Over the past 20 years or so, it has grown to a $120 billion business, far larger than Microsoft’s $75 billion Azure cloud business or Alphabet’s $50 billion Google Cloud business.
But many worry that smaller competitors are falling behind when it comes to AI services. To be sure, Microsoft’s growth has been impressive, while Alphabet has seen strong relative growth. But Amazon is building infrastructure as fast as it can, and management has reiterated that demand is outstripping supply as it works to increase capacity. This is the opinion of Microsoft and Alphabet.
Meanwhile, Amazon’s AI services revenue is growing at a triple-digit rate against a multibillion-dollar revenue base.
But Amazon is well-positioned to benefit from increasing investment in artificial intelligence and the continued shift of business computing from on-premise servers to the cloud. This long-term trend could ensure consistent sales growth even as AI spending slows. But AI’s growth and broader business adoption could accelerate a long-term trend of moving other computing needs to AWS.
This should help investors meet the huge amounts management is spending to meet demand for AI services. Management plans to spend more than $100 billion in capital expenditures in 2025 to build data centers. This had an impact on free cash flow, which fell to $18 billion in the last 12 months. USD from 53 billion USD 12 months ago.
Not only is this spending supported by expected growth in demand, but Amazon is also the market leader in two other businesses.
While Amazon’s cloud business gets all the attention in the current AI boom, it’s also the world’s largest online retailer. And this retail business is becoming increasingly profitable, ensuring that despite AWS’s rapid growth, it still accounts for around 40-45% of operating income.
Two of the biggest contributors to the retailer’s profitability are Amazon Prime subscriptions and its logistics operations. Amazon’s subscription service revenue, which is largely driven by Prime memberships, has been growing steadily at about 10% a year. That’s not slowing down, as management continues to increase Prime subscriber benefits, including adding premium content to the streaming service, a partnership with Grubhub, and more. Despite its growing list of benefits, Amazon can more than make up for the costs with subscription pricing and increased revenue in other parts of the business used by Prime members.
In addition, Amazon’s logistics overhaul and AI-based inventory management have helped reduce order fulfillment costs and increase delivery speeds, making Prime membership even more attractive and profitable. Amazon saw a 12% increase in paid units in the second quarter, but only a 6% increase in shipping costs. This increased the margin of its retail operations.
However, the biggest impact on Amazon’s retail operating margins comes from its growing advertising business. While Amazon’s advertising is closely tied to its retail business, it now encompasses much more, including video ads on streaming services. Advertising revenue grew in the second quarter, up 22% year over year. Because revenue is so strong, it boosted Amazon’s North American gross operating margin to 7.5 percent, up 190 basis points from last year.
These trends should continue to benefit Amazon’s profitability, with AWS growth remaining a key driver of operating income.
Amazon’s biggest financial focus has always been long-term free cash flow growth. The massive expansion of AI has been a major dampener on this metric. However, Amazon should begin to see a rapid improvement in free cash flow as AWS costs normalize and retail continues to increase its operating margin.
Amazon shares are trading at a 2% free cash flow yield, given the company’s focus on continually increasing the amount of cash it generates. For it to reach 3 trillion dollars in 2027. it should create 60 billion USD free cash flow. That may seem like a big ask for a company that has managed less than a third of that amount in the past year, but it is possible. Remember that within 12 months of 2023, Amazon until 2024 earned 53 billion USD. Continued growth in operating cash flow and limited growth in capital spending could propel Amazon to nearly $60 billion. USD annual free cash flow.
But investors may be willing to expand that number significantly if Amazon shows strong demand for AI, boosts AWS revenue and margins, and leads management to put more money into data centers in the near term. With a current market cap of around $2.3 trillion, Amazon could reach $3 trillion in the next couple of years.
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Adam Levy has held positions at Alphabet, Amazon, Apple and Microsoft. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Microsoft and Nvidia. The Motley Fool recommends the following options: Long 2026 January $395 calls on Microsoft and short 2026 January $405 calls to Microsoft. The Motley Fool has a disclosure policy.
Forecast: by 2027 this artificial intelligence (AI) stock will join Nvidia, Microsoft, Apple and Alphabet in the $3 trillion club Originally reported by The Motley Fool
