Over the long term, Amazon (NASDAQ: AMZN) has made some shareholders very wealthy. Amazon shares are up by a decent 49% over the past five years – but since the company listed on the stock market in 1997, the share price gain has been over 263,000%!
For a long time, Amazon’s share price growth reflected excitement about its future business growth prospects more than how much money it was making at the time.
It seems odd, then, that the past year has seen stock market excitement about AI – yet Amazon shares are up just 4% over the past 12 months.
After all, while AI investors have zoomed in on stocks like Nvidia (up 28% in a year), Amazon is already on path to be one of the biggest AI companies in the world.
Is the market missing that?
A costly business to be in
Maybe not, in fact.
Nvidia and Amazon are in some cases on different sides of the deal when it comes to kitting out AI data centres. Nvidia is riding high because it is selling so many of its chips at high prices, with juicy profit margins.
Amazon, by contrast, is having to splash the cash on a grand scale to buy vast amounts of pricey chips as it aims to ramp up its data centre footprint.
There is more to the story than that, in fairness.
Through its subsidiary Annapurna Labs, Amazon has grown a large in-house chip design capability that is helping it reduce the amount it would otherwise have to pay to third-party vendors like Nvidia as it expands its AI capabilities.
This is huge business in itself: Amazon’s daftly named Trainium2 chip is already a multibillion dollar business on its own.
Such chips have also helped Amazon secure investments in leading AI businesses including Anthropic. Those investments could potentially turn out to be very valuable. Indeed, Amazon booked a $9.5bn pre-tax gain in its most recently reported quarter on such investments.
Still, there is no getting away from the fact that – especially thanks to its AWS subsidiary – Amazon is on the hook for vast expenditures on an AI infrastructure whose long-term value remains to be proven.
Another Amazon growth story
Still, that “build it and they will come” approach has been a consistent feature of Amazon’s stunning value creation for shareholders over the past three decades.
We have seen that in everything from semi-automated distribution centres to the launch of Amazon Prime and the company’s Prime Air fleet of cargo planes.
AI is now central to Amazon’s view of its future. As the company’s boss told investors in the Autumn, “we continue to see strong momentum and growth across Amazon as AI drives meaningful improvements in every corner of our business”.
AWS alone is growing by around 20% annually. On top of that, Amazon’s wider business continues to have a strong competitive position thanks to its large customer base, economies of scale, and proven business model.
Amazon shares are selling for 34 times earnings at the moment. The huge AI spend brings risks, so for now I am not ready to invest.
But I think the market may be missing just how transformative AI could be for Amazon. This year, I will watch the share price and business performance closely.
