For Amazon, the Next Trillion Won't Be As Easy As the First

Last spring, when Amazon (NASDAQ: AMZN) shares topped $1,000 for the first time, I suggested that the stock could hit $2,000 in the not-too-distant future.

Indeed, Amazon doubled from $1,000 a share to $2,000 in just 15 months, a phenomenal growth rate for a company of its size. With the stock topping $1 trillion in market cap shortly after it reached $2,000 a share, it begs the question of how long it will take the company to get to $2 trillion -- if it can at all.

Before exploring that, let's take step back and chart Amazon's blistering path from $1,000 to $2,000 a share.

That was fast

There was plenty of excitement along the path from $1,000 to $2,000 for Amazon. The company's acquisition of Whole Foods last June sent shockwaves through the grocery industry, and it signaled Amazon's intent to make a play for a giant retail segment that and eluded it.

Revenue growth accelerated thanks in part to the Whole Foods deal, though it will now slow as it laps the acquisition. Earnings have also surged during that period as its Amazon Web Service cloud-computing division ramps up and its North American retail division has begun delivering meaningful profits, thanks largely to the growth of its marketplace, or its third-party-seller business.

Advertising also presents an evolving opportunity for the company, and it's been an active buyer outside of traditional retail, snatching up Ring, the smart doorbell company, and Pillpack, an online drug seller, each for $1 billion.

Time for an encore?

Amazon's valuation has always been divorced from traditional fundamentals. The e-commerce giant has barely been profitable for most of its history, and even today, it trades at a triple-digit P/E ratio.

But with its market cap in the stratosphere, its fundamentals will become more important to investors as the risk of a crash increases without underlying profits and blockbuster sales growth.

During the last 15 months, when the stock doubled, Amazon's price-to-sales ratio expanded from 3.4 to about 4.8. However, the acceleration in its profit growth may have made up for it as its P/E ratio has fallen modestly to 154 during that time.

Therefore, it seems like profits rather than sales will be the key determinant in the company's ability to reach $2 trillion, and Amazon has been answering the call. Through the first half of the year, North American operating profits have tripled to nearly $3 billion, while AWS has grown about two thirds, also to $3 billion. Meanwhile, its international e-commerce division continues to operate at a loss.

With powerful positions in growth industries like e-commerce, cloud computing, voice-activated technology, video streaming, and advertising, and the powerful competitive advantages its Prime loyalty program generates, Amazon's profits will almost certainly continue to grow at a robust space, especially as the company appears to be reaching scale across many of its business segments. However, profit growth alone may not be enough to drive the stock to $2 trillion.

Rare air

Amazon is just the second company to reach the trillion-dollar mark, passing the milestone just a month after Apple did. The so-called FAANG group of tech giants has been surging over recent years, but $2 trillion is a long way from $1 trillion, and with Amazon now testing Apple for the title of world's most valuable company, there's a big difference between now and when Amazon was worth just half a trillion.

When Amazon was worth around $500 billion a year ago, the e-commerce giant had plenty of company. In fact, Apple, Facebook, Microsoft, and Alphabet were all worth more than Amazon was. In other words, $500 billion seemed like a reasonable valuation at the time, based on its peers.

Today, with the company now worth $1 trillion, in league with only Apple, that valuation seems harder to justify, especially considering Amazon's triple-digit P/E ratio. If Amazon surpasses Apple in value, the market is likely to become more skeptical of its continued growth.

Given that, the next double for Amazon stock will be more difficult than the last. The company still has plenty of growth opportunities, and it may not even be an exaggeration to say that its total addressable market is the world. However, it will be harder for the company to make it to the next milestone without some of its peers getting there with it -- or some serious Apple-sized profits, which is going to take time.

For now, Amazon investors may have to do something they haven't done in a long time: just be patient.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool’s board of directors. LinkedIn is owned by Microsoft. Jeremy Bowman owns shares of Facebook. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, and Facebook. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.