Andy Jassy Believes AWS Can Hit $1 Trillion in Revenue. Here's When the Math Says It Might Happen.

No company has ever generated $1 trillion in revenue in a calendar year. Andy Jassy, chief executive officer of Amazon (NASDAQ: AMZN), thinks one of its divisions is well on its way to surpassing that figure on its own. Last quarter, Amazon Web Services (AWS) hit $169 billion in annual recurring revenue (ARR) and sales rose an astonishing 37% year-over-year.

Previously, Jassy has said that AWS could reach hundreds of billions of dollars in annual revenue. On the latest Amazon earnings call, he revised this estimate, saying the company now believes annual revenue for this division could eventually surpass $1 trillion. Here's when it could happen and what it could mean for Amazon stock.

AWS' growing potential in AI

AWS is the largest cloud provider in the world by revenue. The company builds data centers and then contracts the computing power to third-party companies, such as its long-term relationship with Netflix for video streaming. Companies have transitioned their IT infrastructure to the cloud during the past decade, allowing providers like AWS to continue gaining market share in services such as compute, storage, databases, and more.

This business model has been supercharged by demand for artificial intelligence (AI). For example, AWS has a major partnership with the fast-growing AI lab Anthropic, which plans to spend tens of billions on cloud computing in the coming years. Spending from AI start-ups is why AWS revenue growth accelerated to 37% last quarter, its fastest pace of revenue growth since 2021, when the business was significantly smaller than it is today.

With the boom in AI spending and the continued shift of traditional IT spending to the cloud, AWS could average 20% revenue growth during the next decade. That would bring its ARR to $1 trillion by the beginning of 2036, or about 10 years from now. It may seem outlandish, but this is the power of compounded growth in the double-digit percentages.

Amazon CEO Andy Jassy. Image source: Amazon.

How much profit will $1 trillion in revenue earn?

Where AWS shines is in its superb profit margins, stemming from years of operating its data centers after enormous upfront spending. Amazon has forecast capital expenditures of as much as $220 billion this year, primarily to expand AWS data center capacity.

Last quarter, AWS had a trailing-12-month operating margin of 37%, indicating how much profit it can earn from its existing infrastructure. Applying a similar figure if AWS reaches $1 trillion in sales would equate to between $300 billion and $400 billion in operating earnings, depending on exactly where margins end up a decade from now.

During the past 12 months, Amazon's total operating earnings were $98 billion.

AMZN EBIT (TTM) data by YCharts

Buying Amazon stock today

Taking the long view with Amazon stock could be fruitful during the next decade. AWS revenue of $1 trillion could mean hundreds of billions in earnings power. That is cheap compared to the stock's current market cap of $2.8 trillion.

This also excludes the steadily growing e-commerce and retail operations, which generated $450 billion in revenue in North America alone during the past 12 months. That segment will probably reach $1 trillion in revenue before AWS does, albeit with lower profit margins.

Together, Amazon's retail business, advertising revenue, and cloud segment should lead to trillions in revenue and hundreds of billions in earnings power by the middle of the next decade. Assuming it can reach $400 billion in consolidated earnings, a typical price-to-earnings ratio of 20 would translate into an $8 trillion market cap, meaning multibagger returns during the next 10 years. That makes Amazon stock a solid stock to buy right now.

Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Netflix. The Motley Fool has a disclosure policy.