One of the few guarantees Wall Street offers investors is change. Throughout history, the combination of innovation, competitive forces, legal decisions, and acquisitions has consistently fueled change atop Wall Street's leaderboard.
In 1980, eight of the top 10 largest publicly traded companies in the U.S. were in the oil and gas, automotive, or chemical industries. As of 2024, none of these 10 companies remained in the top 10 by market cap. In fact, only one of the top 10 public companies by market cap (Microsoft (MSFT 0.59%)) as recently as 2000 is still a top-10 company just 24 years later.
Amazon has a real path to become the most valuable company. Image source: Amazon.
Although it's tough to envision a world where Apple (AAPL -0.69%) or Microsoft aren't at the top, history suggests this is precisely what'll happen at some point in the future -- perhaps even sooner than you think.
While nothing is written in stone, a strong argument can be made that e-commerce giant Amazon (AMZN -1.07%) can become the largest publicly traded company by 2027.
A changing of the guard could be in order
For Amazon to stand taller than its peers, one of three things would need to happen. The handful of trillion-dollar companies within sight of Amazon's market cap would need to 1) underperform, 2) stagnate, or 3) increase in value at a slower pace than Amazon's stock.
Apple's reign as the largest public company may well be over. Although it's generating abundant operating cash flow and is still the leading smartphone company in the U.S. by a long shot, its physical product growth engine has stalled.
The good news for Apple is that CEO Tim Cook is overseeing a successful ramp-up of the company's subscription services segment. Additionally, more than $600 billion in aggregate share repurchases since the start of 2013 have provided a tangible lift to Apple's earnings per share. Nevertheless, sales of the company's physical products (iPhone, iPad, Mac, and wearables) fell across the board in fiscal 2023 (ended Sept. 30, 2023). Without double-digit sales growth, Apple's forward earnings multiple of 26 becomes far less palatable for investors.
Though Microsoft and Nvidia (NVDA 1.27%) appear virtually unstoppable at the moment, thanks largely to the artificial intelligence (AI) revolution, these two highfliers are fallible.
For the past three decades, every next-big-thing investment trend has navigated its way through an initial bubble period. This is to say that investor expectations for the uptake of a new technology, innovation, or trend have consistently outpaced the actual uptake or acceptance of that trend. AI is unlikely to be the exception to this unwritten rule.
Despite becoming the infrastructure backbone of high-compute data centers, Nvidia is staring down a couple of big headwinds. It'll be contending with its first true taste of AI-driven graphics processing unit (GPU) competition in AI-accelerated data centers in 2024, and is likely to see its pricing power for A100 and H100 chips diminish as AI-focused GPU scarcity wanes.
On the other hand, Microsoft has the luxury of falling back on the phenomenal operating cash flow of its legacy segments. While it likely faces less downside risk than Nvidia if the AI bubble bursts in 2024, or shortly thereafter, Microsoft's forward price-to-earnings (P/E) ratio of 30 is toward the high end of its range over the trailing decade. In other words, the risk may outpace the reward potential for Microsoft stock over the next couple of years.
As for Alphabet (GOOGL -0.77%) (GOOG -0.75%), I expect the parent company of internet search engine Google and streaming platform YouTube to continue to thrive. Alphabet stock remains historically cheap, relative to its future cash flow, and Google has a practical monopoly on global internet search -- a nearly 92% share in December 2023.
The only flaw (if you want to call it that) with Alphabet is that more than three-quarters of its revenue derives from advertising. This leaves Alphabet exposed to economic downturns, which leads me to believe that Amazon can simply outpace any gains in Alphabet's stock over the next four years.
Image source: Getty Images.
One operating segment is key to Amazon surpassing a $3 trillion market cap
This leads us back to Amazon, which is the only other publicly traded company with a trillion-dollar market cap.
Most people are familiar with Amazon because of the company's world-leading e-commerce segment. A 2022 report from Insider Intelligence (formerly eMarketer) estimated that Amazon would account for just shy of 40% of U.S. online retail sales. For context, the 14 closest competitors to Amazon's online marketplace were expected to trail its share by over 8 percentage points on a combined basis.
But while e-commerce represents the proverbial face of Amazon, it's by no means the company's growth engine. Whereas online retail sales draw plenty of traffic to the company's website and account for a significant percentage of total revenue, the margins associated with online sales are razor thin. This means a recession could adversely impact Amazon's top line, but it'll have only a minimal impact on its income and operating cash flow.
Amazon's growth is dependent on the company aggressively reinvesting its operating cash flow into high-growth initiatives. It's why the traditional P/E ratio isn't a particularly useful metric with Amazon.
At the moment, no segment is of greater importance to Amazon's future than Amazon Web Services (AWS). According to tech analysis company Canalys, AWS was the leading provider of cloud infrastructure services, with a 31% share of the global market, as of the end of September.
The first factor that makes AWS critical to Amazon's success is the growth runway for cloud computing. While estimates vary, a report from Fortune Business Insights projects a compound annual growth rate of 20% between 2022 and 2030, with annual cloud computing sales surpassing $2.4 trillion by the end of the decade. As the leader in cloud infrastructure service spending, AWS finds itself on the leading edge of this fast-paced trend.
But what's arguably even more important is the considerably juicier operating margin Amazon generates from AWS. During the September-ended quarter, AWS brought in just a shade above $23 billion in sales, which works out to $92 billion on an annual run-rate basis.
Whereas Amazon generated a negative 2.7% operating margin on its non-AWS segments ($306 billion in net sales) through the first nine months of 2023, it's earned a scorching 26.2% operating margin via AWS through nine months. If AWS can continue growing by a double-digit percentage, which seems likely given that enterprise cloud spending is still in its relatively early stages, it'll have an outsize impact on Amazon's cash-flow generation in the years to come.
AMZN Price to CFO Per Share (TTM) data by YCharts.
Throughout the 2010s, Amazon stock closed out each year valued at a multiple of 23 to 37 times its cash flow. But thanks to AWS and its rapidly rising $92 billion annual sales run rate, Amazon's cash flow is expected to nearly quadruple between 2022 and 2027 to north of $17 per share.
Based on this, Amazon's current share price of $153 represents a multiple of approximately 9x consensus cash flow by 2027. More than doubling Amazon's market cap to $3.2 trillion would comfortably lift its cash-flow multiple to 18x consensus estimates in 2027, yet would still be historically inexpensive compared to what investors willingly paid to own shares of Amazon for the entirety of the previous decade.
If Amazon simply sustains its historic valuation, relative to cash flow, over the coming four years, it'll have a reasonable pathway to become the largest publicly traded company by market cap.
