This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Three years ago, OpenAI's ChatGPT hit the scene, spurring a new industry called generative artificial intelligence (AI) that's revolutionizing the way companies do business. Amazon (NASDAQ: AMZN) already incorporated this technology into many aspects of its operations, and investors can expect to see the effects of this transition over the next three years. Let's dig deeper to see how this story might play out for the stock.
An increasingly undeniable opportunity
At first, it seemed like generative AI might be more hype than substance, but those fears are now convincingly put to rest. We no longer need to rely on Wall Street's analyst projections to see what is happening. The tech is already creating boatloads of shareholder value for early movers.
CNBC reports that AI industry leader OpenAI has hit annual recurring revenue of $10 billion per year. A recent $40 billion private funding round puts its valuation near $300 billion, making it one of the world's most valuable private businesses. The good news is that, despite not being a pure-play generative AI company, Amazon has plenty of ways to tap into this monumental value-creation opportunity.
Amazon's compelling AI strategy
Amazon has a close relationship with OpenAI rival Anthropic, which also specializes in large language models (LLMs). Amazon is only a minority owner of the company. But the partnership compels Anthropic to use Amazon's infrastructure solutions, such as its cloud computing platform, Amazon Web Services (AWS), to manage its data and use its AI chips, Trainium and Inferentia, to help run and train its models.
Amazon also has ways to benefit directly from AI technology through massive cost-cutting opportunities. According to CEO Andy Jassy, the company expects to shrink its corporate workforce over the coming years as it adopts more generative AI tools and agents. This news comes after Amazon already laid off 27,000 employees since 2022 (out of a total of around 1.56 million, including its warehouses).
Being such a large employer paradoxically turned into a liability for Amazon. The company had to deal with protests, strikes, and calls for unionization. This tension may have led to the closure of all seven of Amazon's warehouses in Quebec, Canada, leading to possible legal action alleging anti-union behavior (the company denies this).
For Amazon, AI and robotics offer the opportunity to reduce political exposure while shifting its employee mix toward higher-skilled and potentially better-paying roles.
The company has become a leader in robotics, deploying a jaw-dropping 1 million robots across its facilities (that's almost as many robots as Amazon has human workers). As this technology improves, it could boost Amazon's productivity and help it stay competitive against rivals like Walmart, which is encroaching on its economic moat by pivoting to e-commerce. According to The Wall Street Journal, Amazon now ships about 3,870 packages per employee, up from 175 in 2015, due to robot help.
Where will Amazon be in the next three years?
The positive catalysts are already starting to show up in Amazon's operating results. First-quarter net sales increased by a respectable 9% year over year to $155.7 billion, driven by strength in the AWS segment, which jumped 17% amid surging demand for AI-related services.
Amazon's operating income jumped 20% year over year to $18.4 billion. Over the coming years, investors should expect the company's bottom line to maintain a strong growth trajectory due to companywide cost-cutting and higher-margin AWS growth. Shares look likely to continue outperforming the broader market.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
