Why Amazon Stock Is a Worthy Artificial Intelligence (AI) Investment

Amazon (AMZN 0.04%) may not be the first stock that comes to mind when the words artificial intelligence (AI) are mentioned. However, Amazon is more exposed to this technological wave than most people realize.

AWS is benefiting from two technological trends

Amazon and AI have a long-standing relationship, with AI already deeply integrated into its core business, including its e-commerce platform, advertising products, and logistics operations. However, the latest advancements in generative AI are providing a significant boost to its cloud computing arm, Amazon Web Services (AWS).

Cloud providers like AWS are benefiting greatly from the rise of generative AI for several reasons.

First, developing AI models requires vast computing power and data storage, which many companies can't afford to build in-house. Instead of investing in expensive, dedicated AI servers, businesses can rent the necessary infrastructure from cloud providers like AWS, offering a cost-efficient solution for accessing advanced AI hardware.

Second, business workloads are still migrating from on-site to the cloud. This is a slow transition and can be very tedious. However, with help from Amazon Q (its AI assistant), this migration is made easier.

Cloud computing is expected to boom over the next five years, with Mordor Intelligence projecting that the overall market will rise from $680 billion in 2024 to $1.44 trillion by 2029. With AWS holding the largest cloud computing market share, it stands to benefit from this transition.

AWS is partially to blame for Amazon's premium valuation

After a strong start to 2024, Amazon stock fell into a late summer slump. While Amazon's commerce divisions generate over 80% of its total sales, Amazon Web Services (AWS) contributes 64% of the company’s operating profits. This means that rapid growth in AWS will have a disproportionately large impact on Amazon’s overall profitability.

In Q2, AWS revenue increased by 19% year-over-year, with an operating profit margin of 36%, making it a highly lucrative business. If AWS were a standalone company, it would likely command a premium valuation. However, Amazon as a whole already trades at a relatively high valuation.

Amazon's forward price-to-earnings (P/E) ratio stands at 40.2, which isn't cheap. This valuation reflects investor enthusiasm for cloud computing and the transformative impact AI could have on AWS. Additionally, it suggests confidence that Amazon's commerce divisions could become more profitable as the company focuses on efficiency.

In the long run, AWS will be a major driver of profits, benefiting from the increasing demand for cloud services. This growth potential supports Amazon's current price, making it a compelling investment despite its premium valuation.

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