Amazon Just Joined the $3 Trillion Club. Here's Why It Could Reach $5 Trillion by 2029.

Amazon (NASDAQ: AMZN) recently joined the $3 trillion club, with its stock driven higher by better-than-expected earnings results. The company's cloud computing platform, Amazon Web Services (AWS), was a standout in the results, and it could be the business that propels the company's value even higher over the next few years. In fact, Amazon could become a $5 trillion company by 2029 simply by sticking with its current course.

Over time, Amazon should see continued acceleration in AWS, ultimately producing considerable earnings and free cash flow for the business. Meanwhile, its core retail operations are increasingly profitable, driven by its growing advertising business and unparalleled scale.

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Can AWS keep accelerating?

Amazon's cloud computing business saw revenue grow 37% year over year, marking the fifth consecutive quarter of accelerating revenue growth for the segment. It's also the highest growth rate for the business in 18 quarters, despite doubling in size during that period.

That growth was bolstered by Amazon's strength in artificial intelligence services (Bedrock, SageMaker, training, and inference) and its own chips business (Trainium, Inferentium, and Graviton). Management said both segments reached a $25 billion annualized run rate last quarter, and both are growing at a triple-digit rate. Meanwhile, its core cloud computing services continued to grow quickly, providing a solid base for the business.

There's a lot of growth left, too. Amazon ended the quarter with $496 billion in contracted revenue. That includes deals with OpenAI and Anthropic to use its Trainium chips. It's set to provide 2 GW worth of Trainium chips to OpenAI. Anthropic will use up to 5 GW of Trainium and Graviton cores over its 10-year agreement with Amazon. As these deals ramp up, AWS should continue to see accelerating growth.

Importantly, the deals also involve the use of Amazon's custom silicon. Management has said that using its own chips rather than traditional GPUs yields better results for its customers and itself, enabling it to achieve wider operating margins. While many fear larger AI workloads will cut into AWS' margin, the push to use more Trainium chips and the massive scale of its growth should ensure margins continue to improve over time.

It's worth noting that AWS isn't the only piece of the growth story at Amazon. Its retail business is quietly producing excellent results as well. The rest of its operations grew revenue by roughly 16% year over year last quarter, helped by shifting Prime Day from the third quarter to the second quarter. Still, double-digit growth for a business generating over $600 billion in annual revenue is pretty impressive.

What's more, margins are expanding for the retail business thanks to strong growth in advertising and improvements in its logistics network. Both should continue to push profitability higher, providing a solid base of earnings.

What could prevent Amazon from reaching $5 trillion?

As mentioned, if Amazon continues on its current path, it should be able to reach a $5 trillion valuation in the near future. Strong revenue growth, plus an expanding operating margin, is a recipe for exceptional earnings growth. Meanwhile, the stock trades for just 22 times forward earnings.

Even if it maintains that earnings multiple, Amazon would only have to grow earnings an average of 18% per year to reach a $5 trillion market value by 2029. That's well within reason, considering the revenue expected to come to Amazon over the next couple of years through agreements with the leading AI labs, in addition to the continued growth of the retail business.

There are two big risks facing Amazon. The first is a collapse in demand for AI compute. While there are some edge cases where Anthropic or OpenAI is unable to pay on its commitments, those seem very unlikely. The bigger risk is that the hyperscalers build out more capacity than needed, and that weighs on pricing. That's mitigated by the upfront commitments signed with Amazon.

CEO Andy Jassy noted that the lead time for server expenses is a matter of months, and they have a useful life of about five years, with a payback period of just under three years. Servers make up the bulk of capital expenditures in most quarters, even as Amazon's standing up tons of new data centers to meet demand. But the tight lead time for servers gives it more leeway to pull back if it sees a drop in demand.

The massive capital required to meet the growing demand for compute will likely push Amazon's free cash flow further into negative territory. Investors may not be as keen to buy the tech stock if it's burning cash. Investors overly focused on near-term cash-flow challenges could weigh on the stock price. But I expect the company will start producing very strong free cash flow in 2028 and 2029, which will allow the stock to climb higher and hit the $5 trillion milestone.

Adam Levy has positions in Amazon. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.