Amazon.com, Inc. (AMZN) stock is killing it right now. In 2015, shares of the online retail giant soared 118%, good for the second-best returns — behind Netflix, Inc. (NFLX) — in the entire S&P 500.
Nor has AMZN stock been a slouch over the past week. Shares jumped 14% in just two days after the company reported a remarkable first-quarter earnings report. CEO Jeff Bezos added $6 billion to his fortune (on paper).
With a market capitalization around $300 billion, Amazon is the eighth-most valuable company in the world. So to hear an all-star venture capitalist like Chamath Palihapitiya say that AMZN stock can be a 10-bagger stock in the next 10 years is pretty astounding.
Palihapitiya said as much at the annual Sohn Investment Conference in New York earlier this week, saying he thinks Amazon could be worth $3 trillion within a decade.
Does the Math Work for AMZN Stock?
By no means is it impossible for a company to see its stock price soar 900% in 10 years. Already, AMZN stock has rocketed 1,784% higher in the trailing decade, meaning if you’d invested $1,000 in Amazon shares in May 2006, you’d have $18,840 today. Not bad.
The trouble, however, is that returns of the sort Palihapitiya thinks AMZN can achieve are literally unprecedented for a company the size of Amazon. That almost goes without saying — there’s never been a $1 trillion company, much less a $3 trillion company.
But, just as fellow Sohn participant David Einhorn has suggested in the past, there’s no rule against a company being worth $1 trillion. Nor is there such a rule for the $3 trillion level.
To get there, AMZN stock will have to return between 25% and 26% a year for the next 10 years. Through the end of 2015, Warren Buffett has guided Berkshire Hathaway Inc. (BRK.A, BRK.B) to annualized percentage gains of 20.8%. Does Bezos think he’s better than Buffett?
Billionaire beefs aside, Palihapitiya says his models tell him Amazon’s current bread-and-butter retail biz will be worth $1 trillion by 2025, while cloud computing arm Amazon Web Services (AWS) will be worth $1.5 trillion. The third component of value is Bezos himself, who he notes has turned $18 billion in operating income to over $200 billion in value.
In touting AMZN stock on Wednesday, Palihapitiya asserted:
“If you believe in the internet, you have to believe in Amazon. If you believe in buying things, you have to believe in Amazon. If you believe in consumer consumption you have to own Amazon.”
So, at the end of the day, is it possible? Certainly. But to achieve this incredible rate of return, Amazon has to continue investing heavily in growth and must fend off new competitors, especially when it comes to AWS.
Investors, too, must continue to value the company favorably.
Finally, Jeff Bezos cannot, under any circumstances, be hit by a bus. As an AMZN shareholder myself, I’m pretty adamant about that one.
As of this writing, John Divine was long AMZN stock. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
