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From one perspective, Amazon (NASDAQ: AMZN) seems to defy numerical principles. As companies become large, growth percentages tend to slow from year to year since the company has to produce more to achieve the same percentage increase.

Amazon has managed to sidestep the issues with slowing growth that often plague many larger companies. Despite its massive size, analysts still predict Amazon can generate 192% earnings growth over the next three years. How Amazon is projected to accomplish that seemingly difficult achievement offers a template for other large companies and lays waste to the idea that bigger companies have to settle for modest growth rates.

Amazon’s growth path

At a $1.4 trillion market cap, Amazon has become one of the world’s largest publicly traded companies. Typically, such large sizes tend to slow down growth because of the need to produce larger nominal increases to yield the same growth percentage.

Where Amazon succeeded is in pushing this growth to the limit. For 2023, estimates from 13 different analysts for the company’s earnings stand at a consensus level of $2.23 per share. Only two analysts have projected earnings to 2026, but those two believe profits will rise to a consensus $6.51 per share.

This amounts to a 192% surge in just three years, well beyond the 38% average growth the S&P 500 would grow over the same period based on average annual gains. Assuming the estimates hold and Amazon maintains a consistent business valuation, such an increase would take its market cap to nearly $4.1 trillion!

Amazon’s strategy

So how does such a large company create an estimated $2.7 trillion in market value in such a short time?

The answer to that question comes from looking at Amazon for what it has become. Most customers and many investors look at it as primarily an e-commerce company. Nonetheless, even though online selling is the face of the company, it looks like its worst-performing business.

Online stores are part of Amazon’s North America and International segments. But despite accounting for over $218 billion in revenue, these segments produced less than $2 billion in operating income. And they include faster-growing businesses such as advertising, subscriptions, and third-party seller services.

Amazon did not break out operating income for these businesses. However, they grow revenue at double-digit rates, far faster than online stores. That could mean its online stores actually lose money.

So, how does Amazon earn profits?

Hence, comparatively smaller businesses under Amazon’s umbrella likely drive all of the profitability. The largest of these is Amazon Web Services (AWS), its cloud computing arm. Its revenue of $43 billion in the first half of the year, around 17% of the company total, grew by only 13%.

Although that represents a slowdown from past years, this comparatively small amount of revenue generated $10.5 billion in operating income, about 84% of the company’s total.

Operating income shrunk from year-ago levels as companies slowed cloud spending amid a sluggish economy. Nonetheless, Fortune Business Insights forecasts a 20% compound annual growth rate for the cloud industry through 2030. Hence, that slump is unlikely to last.

Moreover, subscriptions, advertising, and online seller services should continue to grow. As long as such businesses drive most or all of the profit growth, the 192% profit gain is a realistic goal, even for a behemoth like Amazon.

Making sense of Amazon’s future

Even with a $1.4 trillion market cap, Amazon has figured out how to achieve an estimated 192% growth over the next three years.

Admittedly, such projections carry a degree of uncertainty. Estimates almost always change, and valuations rarely remain the same.

Still, Amazon has enhanced its profit growth as fast-growing smaller businesses overshadow a massive but likely unprofitable e-commerce enterprise. Such dynamics should keep Amazon growing at a relatively rapid rate, which could add trillions to its market cap as AWS and its e-commerce support businesses carry Amazon forward.

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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. Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends The Motley Fool has a disclosure policy.

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