This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
I use Nov. 30, 2022, as the unofficial start of the artificial intelligence (AI) revolution. This is the day that OpenAI released ChatGPT to the general public.
Since ChatGPT became part of mainstream culture, the S&P 500 (SNPINDEX: ^GSPC) and Nasdaq Composite (NASDAQINDEX: ^IXIC) indexes have notched multiple highs -- thanks in large part to megacap technology stocks witnessing parabolic rises. Among the biggest gainers in the capital markets have been the "Magnificent Seven" stocks.
Within that cohort, Nvidia and Meta Platforms have been the top performers by a mile -- gaining 601% and 409%, respectively, as of this writing (March 17).
Coming in third place is e-commerce and cloud computing leader Amazon (NASDAQ: AMZN), whose stock has rocketed 102% since the release of ChatGPT. While this return is multiples higher than gains seen across the S&P 500 and Nasdaq, I think even better days are ahead for Amazon.
Let's explore how Amazon is making waves in the AI arena and analyze how the company's investments in the technology are already bearing fruit. In addition, I'll review Amazon's valuation and make the case for why I think now is a great time to buy the stock hand over fist and prepare to hold for the long run.
Amazon's billion-dollar bets in AI are paying off big time
While companies such as Nvidia, Microsoft, and Tesla fetch a lot of the attention surrounding the AI narrative, Amazon has quietly been making some major moves of its own.
For starters, the company has invested a whopping $8 billion into a close peer of OpenAI called Anthropic. As part of their alliance, Anthropic is training its generative AI models on Amazon's cloud infrastructure. In addition, the AI developer is also leveraging Amazon's custom Trainium and Inferentia chips -- a move that I think could prove competitive to Nvidia and its graphics processing unit (GPU) behemoth down the road.
Since Amazon partnered with Anthropic in September 2023, the company has witnessed significant acceleration in its cloud business -- Amazon Web Services (AWS). To add some color here, revenue in AWS grew at 13% annually in the fourth quarter of 2023 all while growing operating income by 39% year over year.
However, as of Q4 2024 AWS grew at 19% year over year and widened its operating income growth to 48%.
While this is all encouraging, Amazon doesn't appear to be resting on its laurels. According to various company press releases, Amazon is planning to spend upward of $30 billion on data centers in Georgia, Ohio, Mississippi, and Mexico over the next several years.
To me, there's an interesting cycle at play here in that Amazon's integration of AI across AWS is leading to consistent cash flow growth, which the company then reinvests right back into AI-powered services.
Lastly, outside of chip technology, cloud infrastructure, and data centers, Amazon is also investing heavily into AI robotics, specifically, robotics that are implemented in the company's warehouses in an effort to automate fulfillment processes. I think this is a savvy choice by Amazon, as the company could be able to unlock significant efficiencies in the e-commerce business, complementing the widening margins already witnessed in the cloud segment.
Amazon stock is trading at a prime valuation that's too good to pass up
Nvidia has been the darling of the AI revolution so far, and while I think the company's future is bright, I have my doubts over whether Nvidia stock can soar by several hundred percentage points over the next 10 years. At some point, Nvidia's growth will likely exhibit signs of slowing down -- especially as more competing chips begin to break onto the scene.
By contrast, I think Amazon's AI growth phase is still in its early innings. The company has several different projects at hand, and management appears keenly focused on a lucrative combination of accelerating revenue and improving profit margins across major parts of the business -- namely e-commerce and AWS.
Nevertheless, Amazon is trading at just 31 times forward earnings estimates. As the chart below illustrates, Amazon's current forward P/E multiple is significantly discounted relative to the company's five-year average and is hovering around its lowest levels in over a year.
AMZN PE Ratio (Forward) data by YCharts
Given the company's current pace of growth and the potential gains in store as AI becomes more of fixture across the Amazon ecosystem, I see the current valuation trends as a tremendous buying opportunity. Investors looking for a healthy combination of growth and consistent profitability might want to consider buying Amazon stock right now and preparing to hold on tight.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
