Mr. Market Thinks Amazon Will Rule The World

During a recent client meeting, I talked about Amazon (AMZN) and did a deep dive into its valuation. The results were shocking. When you look under the hood of the stock’s valuation, you see that the market’s expectations for future cash flows are shockingly high. Shocking. Let’s get specific

Expectations Investing Analysis on AMZN

As I do for all of my Reverse DCF Case Studies, I use my firm’s valuation models to quantify the future performance of the company required to justify its current stock price.

Specifically, my model shows that to justify ~$239/share Amazon would have to:

1. grow revenue at 10.9% compounded annually for 39 years while also
2. improving its return on invested capital (ROIC) from 14% to 64%.

Let’s put some context around those expectations.

Benchmarking Expectations for AMZN

First, growing revenue at 10.9% CAGR for 39 years means Amazon’s revenue would be $32.2 trillion in 2063.

$32.2. trillion is 26% greater than the United States’ GDP in 2024. $32.2. trillion would also rank Amazon as the third largest GDP in the world in 2063. See Figure 1 for details.

Figure 1: Comparing Amazon’s Revenue to the GDP of the Largest Countries in the World

Sources: New Constructs, LLC and company filings. 2024 GDP stats from Global PEO Services
*2063 GDP values assume a 4% nominal compounded annual growth rate.

It is important to note that the stock price embeds expectations for revenue reaching $32.2 trillion while Amazon – also – increases its ROIC from 14% to 64%.

I think there are several reasons why the expectations embedded in Amazon’s current stock price are too high.

Competitive Realities

Large revenue growth, like what’s embedded in Amazon’s stock price, implies significant market share gains. I note that market share gains are typically won with lower prices, which are not possible with a company that must also increase its ROIC to very high levels. Specifically, a 14% ROIC ranks 135^th in the S&P 500 while a 64% ROIC ranks 11^th, behind firms like Apple (AAPL), Mastercard (MA) and Nvidia (NVDA).

In other words, Amazon’s stock price is implying a doubly-incredible future where the company enjoys huge revenue growth and ROIC improvement as well.

Currently, only one company, Apple, ranks in the top 10 of the S&P 500 for ROIC (7^th) and revenue (3^rd). Amazon’s trailing 12 months revenue ($620 billion) ranks #2 in the S&P 500, just behind Walmart (WMT) at $674 billion. For reference, Walmart’s ROIC is 11%.

So, hypothetically, Amazon would only need to dramatically improve its ROIC rank to join Apple as one of the few companies to rank so highly for ROIC and revenue at the same time.

Expectations Investing Applied

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