2024 was the year Nvidia -- at least briefly -- became the world's largest company by market capitalization. The rising demand for artificial intelligence (AI) has put the computer chip maker in overdrive, with profits gushing. However, with a price-to-earnings ratio above 50 and profit margins expanded to much higher levels than its historical average, I don't think 2025 is a great year to bet on Nvidia. There are cheaper stocks to buy if you want to play the AI trend boom.
Enter Amazon(NASDAQ: AMZN). The technology giant's stock has barely beat the S&P 500 in the last five years, with most of these gains coming in the first year of the COVID-19 pandemic. Here's why it can accelerate growth and finish 2025 as the stock with the largest market cap in the world.
Betting big on AI infrastructure
Amazon's largest profit driver is Amazon Web Services (AWS), the leading cloud computing infrastructure company in the world. AWS is one of the largest buyers of Nvidia chips. It builds the data centers that run the power-hungry AI tools that are growing like a weed. In the last few quarters, AWS' revenue growth has accelerated, starting at 12% year-over-year growth in Q2 2023 and finishing Q3 of 2024 with 19% year-over-year growth. Its annualized revenue run rate is now over $100 billion.
Perhaps more impressive are the profit margins that AWS sports. Trailing-12-month operating margin was 35%, translating to $36 billion in operating income from the segment. As AI demand grows in 2025, I think that AWS can keep accelerating its revenue growth. If revenue can grow by 25% in 2025, that would bring overall revenue to around $130 billion for AWS. With a 35% profit margin, this equates to $45.5 billion in operating income from the segment.
On a longer time scale, there is still a long runway for AWS to grow. As management likes to mention, the majority of IT spending still remains on-premise and is currently transitioning to cloud computing infrastructure. As this trend continues, AWS will take more of the IT dollars that have switched from legacy spending, leading to sustained revenue growth.
Don't forget about retail and advertising
Let's not forget about Amazon's massive retail empire. The e-commerce, subscription, and advertising business is doing $377 billion in revenue just in North America, with $140 billion in more revenue coming from other countries. International segments will likely contribute little to profitability in 2025 due to investments in newer markets such as India. North American profits should continue to climb, though.
Profit margins for North American retail have gone from close to 0% in 2023 to 6% over the last 12 months. With high-margin segments such as advertising growing at 19% year over year, Amazon has plenty of room to expand its profit margins for North American retail yet again in 2025. If this margin expansion continues, I would expect the segment to finish 2025 with 10% profit margins, if not higher. This is not a high hurdle for the company to surpass, either.
If the North America segment can grow to over $400 billion in revenue, a 10% profit margin means over $40 billion in operating income for the segment. This excludes the international retail segment, which still has a long runway to grow in Europe, India, and other markets.
If Amazon can achieve these financial results this year, its consolidated operating earnings should reach around $100 billion. This would be a huge jump from the $60 billion it generated over the last 12 months. With the long runway to grow at AWS and further potential for margin expansion in North American retail, I would expect Amazon's profits to continue growing at a rapid pace over the next few years, meaning that investors will assign it a premium earning multiple (as has been the case historically).
Assuming Amazon will trade at around 40 times its 2025 operating income, the stock will finish the year with a market cap close to $4 trillion. This would put it ahead of the current leaders today in Nvidia, Apple, and Microsoft. As long as these three companies don't have blockbuster years from a financial standpoint, I think Amazon can come from behind and retake its lead as the largest company in the world when it comes to market cap.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Brett Schafer has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Apple, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
