Can Amazon really beat all other companies and make history by reaching the trillion dollar valuation milestone? Several analysts seem to think so. The fact that no other company has ever been able to hit that milestone is a clear indication of how monumental that feat is.
Markets do strange and crazy things, and the tech and retail giant may even get there because of irrational investor sentiment, but two questions now face us: How will AMZN hit $1 trillion in market valuation; and, if it does, how will it stay there?
Amazon reported $135.987 billion in revenues for full-fiscal 2016, 27% growth compared to previous year. How often have we seen a company with more than $100 billion in global revenues grow that by more than 25%. Not very often, to be sure. This surging growth rate despite its size is reason why people started talking about the company more than doubling its current market capitalization of over $400 billion.
Instead of going into the nuts and bolts of their revenue distribution and how the highly profitable Amazon Web Services will be able to help drive Amazon’s retail future, let’s keep our focus on Amazon’s chances of getting to that trillion dollar market cap milestone.
Amazon’s market cap is around $423 billion at the time of writing this article, which is nearly 3 times their 2016 sales of $135 billion. If Amazon holds this 3 times sales valuation, then Amazon needs to get to $330 billion in annual sales to hit a trillion dollars in market cap.
It’s not impossible, but highly improbable.
Amazon should easily go past the $100 billion sales mark in North America. Things have been a bit slow for the company on the international front, and it will take plenty of time and effort – not to mention some good old luck – for Amazon to hit the +100 billion dollar level in international markets. By that time, AWS could hit +$30 billion on its own strengths.
But how did Amazon get this far in the first place?
Amazon doubled its revenues during the 2012 – 2016 period, moving from $61 billion in 2012 to $135 billion in 2016. The company may need a bit more time to double its current $135 billion, may be five years or even more.
To make things even tougher, Amazon’s 3 times sales valuation is unheard of in the retail world, where you often see companies trading around the 0.5 times sales valuation (Walmart’s Price to Sales ratio is 0.46.) Amazon’s high valuation is because of its tremendous growth rate, and its highly profitable technology unit.
So, the odds of valuation multiples going higher from here are quite low. That naturally implies that it will boil down to how fast it can grow its revenues.
The e-tailer does have a great chance to race past $500 billion dollars in annual revenues even though it may take many more years for that to happen. That’s where Walmart is at the moment. But at the same time, growth will naturally slow down as it gets bigger and bigger, causing valuation multiples to shrink as well.
The only possible verdict is that Amazon reaching a trillion dollars in market capitalization could remain a dream forever unless the market goes crazy and continues to value it at a high level even as it approaches the half-trillion sales mark.
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