The case for Amazon being a trillion-dollar company

It’s good to be Jeff Bezos.
It’s good to be Jeff Bezos.
Image: Reuters/Rick Wilking
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Amazon’s stock reached a new high this week after its Black Friday and Cyber Monday bonanza. The company’s market capitalization is hovering around $560 billion, behind only Apple, Alphabet, and Microsoft.

Research analysts at Morgan Stanley think it could go even higher. With Amazon’s core e-commerce business, cloud services platform, signature Prime membership, and other revenue from ads, they make the case that the company could be valued at $1 trillion.

The business of Amazon.com

Morgan Stanley’s case for a trillion-dollar Amazon starts with the core e-commerce business, which analysts think could be worth $600 billion by the end of 2018, based on their revenue projections.

As anyone who has purchased something on Amazon.com knows, there are two types of goods: stuff sold by Amazon, and stuff sold by third-party merchants. Morgan Stanley considers Amazon’s first- and third-party sales to be two distinct businesses, the former valued at about $200 billion and the latter at $400 billion. The difference is that Amazon gets a much better margin on its third-party seller business, presumably because it has to carry fewer operational costs.

Amazon Web Services

In the trillion-dollar scenario, Amazon’s cloud services division could be worth $270 billion. That valuation is actually conservative, Morgan Stanley argues, considering that Amazon Web Services (AWS) has better margins and revenue growth than most of its cloud-services competitors. They project AWS will reach $38.5 billion in revenue by 2020; it did $4.6 billion in the latest quarter, up 42% from the same period a year earlier.

Amazon Prime and advertising

An estimated 85 million Americans, or two-thirds of US households, subscribe to Prime, Amazon’s $99-a-year membership program. Those Prime customers average $1,300 in annual Amazon spending, more than double a non-Prime member.

By 2022, Morgan Stanley sees Prime reaching 146 million subscribers worldwide, for $21 billion in subscription revenue. Working back from that, they believe Prime could be worth $70 billion to investors by as soon as December 2018. Using a similar revenue projection, they think Amazon’s ad business could be worth $55 billion.

Prime is essential to Amazon’s success, and the company has been investing in it heavily. Amazon is particularly concerned with building up last-mile delivery—the final leg from a distribution center to a customer’s home—to enable same-day delivery services like Prime Now, Amazon Fresh, and Amazon Restaurants. The company is hoping those investments pay off by making Prime even faster and more convenient, and convincing more people to subscribe. One potential hurdle is getting US households that earn less than $75,000 a year to sign up.

The trillion-dollar case

Let’s put all that together: a $600 billion retail business, plus a $270 web services segment, a $70 billion Prime business, and $55 billion from ads and other revenue. That’s $995 billion. Or, for our purposes, $1 trillion.