Shares of Amazon (NASDAQ:AMZN) were in the headlines in late May after analysts over at Piper Jaffray said in a research note that Amazon stock would hit $3,000 in two to three years. That implies more than 60% upside from current levels, and a market cap of roughly $1.5 trillion for the ecommerce and cloud giant.
Ostensibly, those numbers seem a bit aggressive; 60%-plus upside over the next two to three years? Amazon stock has already rallied more than 160% over the past three years. Does it really have enough firepower to head another 60% higher? Also, a $1.5 trillion market cap? The world’s biggest companies today are having trouble maintaining a $1 trillion market cap. Amazon shooting to $1.5 trillion would be unprecedented.
In other words, there are ostensible and obvious concerns to the thesis that AMZN stock rallies toward $3,000 in two to three years.
But, there are equally obvious and fundamentally supported reasons why it will happen. Amazon stock will hit $3,000 in two to three years, and nearly $4,000 by 2025.
As such, this is a long term growth stock investors should buy and hold onto for the long run. Huge upside remains in a long term window.
The Amazon Growth Narrative
In the big picture, the Amazon growth narrative is just getting started, and this company will remain a hyper-growth giant for the next several years.
To be sure, growth in the company’s core ecommerce business is slowing, and the business is losing share as traditional retailers pivot more aggressively into the e-retail realm. But, the global digital commerce market is projected to keep growing at a 20%-plus rate for the next several years. Thus, even if Amazon loses share in the ecommerce market, the company’s digital retail business could still grow at a steady 10-15% rate over the next several years.
Importantly, that’s just the sideshow. Over the next decade, the e-commerce business will become less and less important as Amazon more aggressively pursues other high-growth verticals, such as:
- Cloud services ($200 billion addressable market growing at a 15%-plus pace), where Amazon is the biggest player with AWS.
- Digital advertising ($300 billion addressable market growing at 10%-plus pace), where Amazon has the fastest growing digital ad business.
- Connected home ($100 billion-plus addressable market growing at a near 15% pace), where Amazon is the leader with its suite of Alexa-enabled products.
- Pharma (a $400 billion-plus market in the U.S.), where Amazon is positioned with its acquisition of PillPack to launch a nationwide e-pharmacy business.
- Offline retail (a $20 trillion-plus global market), where Amazon is rapidly gaining share though opening cashier-less convenience stores.
In other words, the growth narrative at Amazon over the next several years won’t slow down. Any weakness in the e-commerce business will be more than offset by ramp in the cloud, digital ad, connected home, and/or pharma businesses.
All in all, then, the big picture growth narrative supporting Amazon stock is still in its first few innings.
Why Amazon Stock Will Hit $3,000
The math supporting Amazon stock at levels above $3,000 in two to three years isn’t that hard to follow.
The ecommerce business projects as a 10-15% revenue grower. Meanwhile, the cloud, digital ad, connected home, and offline retail businesses should easily grow at 20%-plus, if not 30%-plus, rates for the next several years. On top of that, you could get a few billion dollar tailwind from new pharma revenues.
Overall, then, Amazon easily projects as a 15%-plus revenue growth company for the next several years, putting revenues north of $600 billion by 2025.
Of the new growth verticals Amazon is diving into, the two biggest (cloud and digital ads) have very high margins. Amazon’s core ecommerce business has low margins. As Amazon’s cloud and digital ad businesses scale, margins will move significantly higher. Today, Amazon operates around a mid single digit operating margin. By 2025, with the cloud and digital ad businesses being much larger revenue drivers, those margins could easily run north of 10%.
Assuming $600 billion-plus in revenues and 10%-plus operating margins by 2025, I think Amazon can net around $125 in EPS by then, too. Based on a big growth 30 forward multiple, that implies a reasonable 2024 price target for Amazon stock of $3,750. Discounted back by 10% per year, that means Amazon stock is fundamentally supported at $3,000 in roughly two to three years.
Bottom Line on AMZN Stock
In the big picture, Amazon is still in the first few innings of its growth narrative. Over the next several years, the company will pivot more aggressively into new growth verticals like cloud and digital ads. As they do, strength in those new businesses will more than offset a slowdown in the e-commerce business. At the same time, margins will move significantly higher because the new businesses have higher margins than the older businesses.
Because of all that, Amazon stock to $3,000 in two to three years is entirely doable.
As of this writing, Luke Lango was long AMZN.