One of the major investment themes in 2023 was artificial intelligence (AI). Each of the “Magnificent Seven” stocks is playing a part in AI, and they assisted in the surge of the Nasdaq Composite by more than 40% last year. This momentum appears to have continued into 2024. The S&P 500 recently reached a new all-time high, and investors are likely wondering where they can discover some value.
Among mega-cap tech corporations, one in particular stands out. E-commerce and cloud computing expert Amazon (AMZN 0.87%) has many exciting catalysts that I believe are overlooked compared to cohorts such as Microsoft, Alphabet, and Nvidia.
Let’s explore why purchasing shares in Amazon stock now could be a profitable opportunity.
Amazon’s hidden profit machine
Amazon may be best-known for its online e-commerce store. However, the company has numerous other operations that provide significant contributions to the overall business. Perhaps the most crucial of these other ventures is the company’s cloud business, Amazon Web Services (AWS).
Despite AWS’s dominance in the cloud computing industry for many years — defending against strong competition from Microsoft, Alphabet, and Oracle — the last couple of years have not been without challenges. The macroeconomy has been subject to several rounds of interest rate increases from the Federal Reserve as it looks to combat inflation.
As a result, businesses of all sizes have been operating under tighter budgets and more stringent cost controls. This situation particularly affected the technology landscape, as demand for expensive software platforms began to decrease. Unsurprisingly, growth in AWS started to decline and significantly impacted Amazon’s overall cash flow.
Nevertheless, the latter half of 2023 brought some positive momentum. Inflation has been decreasing for several months now, and the increasing interest in AI applications injected some much-needed life into AWS in particular. In fact, between the second and third quarter of 2023, Amazon tripled its free cash flow. Although e-commerce accounts for the majority of the company’s revenue, it’s AWS that contributes the most in operating profits. Through the first nine months of 2023, AWS generated more than 70% of Amazon’s total operating income.
Although results for the fourth quarter have not yet been released, I am hopeful that AWS will deliver another outstanding performance. Amazon’s progress on the AI front, although understated, should not be underestimated among the competition.
The foundation of AI
When it comes to the largest technology companies, it appears that the AI conversation largely revolves around Nvidia, Microsoft, and Alphabet. Following its multi-billion-dollar investment in OpenAI — the creator of ChatGPT — a year ago, Microsoft has been on an unrelenting mission to integrate the technology across its Windows operating system. Additionally, billionaire hedge fund manager Bill Ackman has consistently expressed his confidence in Alphabet and the company’s AI vision.
But Amazon, for its part, has made some shrewd moves on its own. In September, the company announced that it was investing $4 billion in a competitor to OpenAI, called Anthropic. As part of the deal, Anthropic will be using Amazon as its primary cloud provider and will train future generative AI models on the AWS cloud.
Furthermore, the partnership with Anthropic ultimately serves as a lead generation funnel for Amazon’s newest cloud development, called Bedrock. Bedrock is a managed services platform that provides developers with a host of large language models (LLMs) and generative AI applications, all housed under one umbrella.
Given the newness of the Anthropic relationship, long-term investors should be encouraged by the prospects the start-up can bring to AWS as it looks to return to accelerated growth.
Should you invest in Amazon stock?
Amazon is indeed one of the most intriguing case studies in recent corporate history. The company began as an online bookseller, eventually evolving into an e-commerce pioneer offering a variety of products. Over the years, the company expanded beyond online shopping and now has advanced businesses across cloud infrastructure, media and entertainment, advertising, logistics, and more. And as Amazon built this platform, the stock price generally increased. The chart below shows that since its initial public offering (IPO), Amazon stock is up over 160,000%.
One of the most important concepts demonstrated by this chart is the power of holding strong conviction positions for long periods of time.
According to the company’s leadership, “90% of the global IT spend still resides on premises. If you believe, like we do, that equation is going to flip, there’s a lot more there for us.” This dynamic underscores the greenfield opportunities Amazon has ahead as it relates to the intersection of cloud computing and generative AI. So even though AWS is a nearly $100 billion run-rate revenue business, I think it’s just getting started.
As of this writing, Amazon stock trades at a price-to-sales (P/S) ratio of 2.9 — well below its long-term average of 4.2. The chart above, and the themes explored in this article, support a long-term bull thesis for Amazon. The company has clearly demonstrated its ability to innovate while creating new and profitable business segments.
Given the demand fueling AI and its expanding proliferation, I see Amazon as very well-positioned to dominate among tech leaders in the long run. Now looks like a fantastic opportunity to scoop up shares at an attractive valuation.