Over the past five years, Amazon (NASDAQ: AMZN) has put in a solid enough performance, up by 35% during that period.
In fact, it is up 34% over the past year alone, reflecting Amazon’s role as a leading tech stock at a time when artificial intelligence (AI) excitement has gripped the market.
But as AI-related stocks go, that is not especially good going. Nvidia is up 46% in a year, while Taiwan Semiconductor Manufacturing has seen its share price grow by 41%.
However, it could be that Amazon turns out to be one of the big winners from AI. And I am unsure the market is fully appreciating how big that opportunity might ultimately be for the company.
A proven approach to optimising efficiency
The investment case for AI rests on the assumption that it can help companies cut costs by replacing certain human inputs with digital ones.
Has that been done before? Of course it has. Not least by Amazon!
Amazon has boomed partly because it has proven masterful at identifying tasks that need to be done within its business and where possible automating them cost-effectively.
In other words, Amazon already has the proven skillset to use AI as a business enabler.
Providing the backbone for the AI revolution
As one old stock market adage runs, when there is a gold rush, buy the shovel maker. The thinking behind that saying is that, while not everyone hunting for gold will strike it, they will all need the relevant equipment to do so.
Amazon can use AI in its own business. But a growing part of the investment case for the stock over the past few years has been the booming demand for the hosting capabilities offered by the company’s division Amazon Web Services (AWS).
In the second quarter, AWS grew its sales 18% year-on-year to hit $31bn. Bear in mind that is just one quarter, so on an annualised basis AWS is set to bring in well over $2bn a week in sales revenues, on average.
AI needs vast server hosting capabilities – and AWS has them.
The AI narrative is compelling
In fact, Amazon emphasised in its most recent quarterly results just how big the AI opportunities it is embracing are. As the company’s boss noted: “Our conviction that AI will change every customer experience is starting to play out”.
That includes expanding the user base for its AI-enabled assistant Alexa+, using AI models to optimise productivity for over 1m robots and launching a variety of generative AI tools both to help build sales and grow productivity.
Long-term potential
At 35 times earnings, Amazon stock is not cheap, although that price-to-earnings ratio is below some popular AI names. Nvidia is on 59, for example.
Investing heavily in AWS’s capability in expectation of surging AI demand brings the risk that if demand is weaker than expected, Amazon will have overspent.
On balance though, I reckon Amazon could turn out to be one of the big winners from AI. That comes on top of its existing strength in other businesses such as digital retail and marketplace provision.
The current price is still too high for my tastes though. So for now I will keep an eye on the shares but do not plan to invest.
