Amazon.com, Inc. (NASDAQ:AMZN) received the mother of all bullish calls last week. That is, Barclays analyst Ross Sandler predicted Amazon stock would become the first to reach a $1 trillion market valuation. Like every other ginned-up metric, however, the trillion dollar market cap is something most long-term investors can ignore.
If you’ve been following Big Tech, $1 trillion market cap forecasts have been bandied about a lot lately. Writing in Forbes, Peter Cohan argued that Apple Inc. (NASDAQ:AAPL) would achieve that milestone first.
As for Amazon stock, Sandler didn’t put a timeframe on when it would hit a trillion dollar market capitalization. Cohan, who I have crossed paths with during my career, estimates that Apple will join the trillion dollar club in 2019, a year before the Seattle-based Amazon. His forecast makes some sense, although I think both pundits are basing their forecasts on theoretical assumptions that are nuts.
$1 Trillion Is a Ridiculous Marker
Sandler argues that the fast-growing Amazon Web Services cloud business will eventually be worth $100 billion. He believes Wall Street is underestimating the division’s growth, so much that its outperformance coupled with stable retail margins will drive Amazon stock up by 30% over the next 24 months.
Sandler is forecasting AWS revenue to hit $16.8 billion this year and $22.3 billion next year. That’s 37.5% growth this year and 32.7% the next. Another Barclays analyst has pegged the total addressable market for the cloud at “trillions of dollars.” If you take Sandler’s forecast as gospel, Amazon’s penetration rate is roughly 1%.
While I agree that cloud computing is a “real” trend, it seems crazy to assume that Amazon stock will continue to expand at historical rates going forward for the foreseeable future, because that’s never happened ever in the history of markets.
Moreover, companies including Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG), Microsoft Corporation (NASDAQ:MSFT), International Business Machines Corp. (NYSE:IBM) and Oracle Corporation (NASDAQ:ORCL) all have big expansion plans for their cloud businesses.
Cohan is basing his argument on math. Apple already has a head start on AMZN with a current market cap topping $700 billion, making it the world’s most valuable company. Amazon stock now stands at about $435 billion. AMZN, which has surged nearly 350% over the past five years, is growing sales at roughly three times the rate of AAPL, which has risen 70% during that same period.
Bottom Line on Amazon Stock
I don’t understand why Cohan didn’t include GOOGL or MSFT in his analysis, since both are more valuable than Amazon stock with market values of $572 billion and $502 billion, respectively.
“There is certainly no guarantee that past trends will continue into the future,” Cohan writes. “… but I believe that as long as Bezos is Amazon’s CEO, its rapid growth is more likely than Apple’s stock price rise to continue.”
Though Cohan is a fan of Amazon stock, I find it hard to justify buying it at its current valuation, especially since Apple stock trades at a more reasonable multiple of 17. Whether AMZN will reach $1 trillion before AAPL should be the furthest thing from the minds of most investors.
As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities.
