Artificial intelligence (AI) is changing the way the world works, for better or for worse. It makes sense that investors are looking to cash in on this opportunity, and AI stocks are dominating market conversations.
As with any hot new trend, there are going to be winners and losers. How can you know in advance? At the very least, it doesn't make sense to jump onto the AI bandwagon unless you're looking at a stock with long-term potential. Amazon (AMZN -2.55%) is a top AI stock, and it's already up over 50% this year. But it can keep going -- here's why.
No competition in retail
There is simply no company on this planet that can compete with Amazon's e-commerce operations right now. Amazon has nearly 40% of the total U.S. e-commerce market with its closest competitor at around 6%.
But Amazon is aiming for more. It continues to pad its moat and make it an uphill battle for any competitor to take market share. It already has a robust third-party marketplace that accounts for more than half of its total e-commerce sales, and it makes acquisitions left and right to add value to its platform.
It has powerful AI capabilities that drive its retail business and inform everything from product selection and recommendations, which generate clicks and purchases, to cheap and fast delivery. Amazon is the original one-day delivery company, and even today, when this is no longer an innovation but an expectation, there are few e-commerce companies out there that can offer this service. Amazon's size and fulfillment network make it a reality that it can achieve, but smaller companies simply don't have the ability to offer it, creating a cycle that benefits Amazon.
Amazon's retail unit has underperformed in recent months for a variety of reasons, notably because there's too much infrastructure bogging down the bottom line, and Amazon is trying to build on top of massive pandemic growth. But it's making progress in restructuring to meet demand. Expect the stock to rise as sales growth increases and profitability improves.
AI for AWS
Amazon's most potent AI brews are being formulated to drive incredible growth at Amazon Web Services (AWS). Amazon announced new generative-AI applications for AWS that can do an astounding amount of human-like work when prompted, and this could have serious ramifications for developers.
The new systems are based on foundation models, which are basically machine-learning models that are so large that they can go from learning to applying. They have so much information analyzed that they can go to the next stage, which is doing the work of the generative part of the process.
And because the new systems are trained on so much general information, users can develop all sorts of content, including copy, branding, and social media campaigns, tied to their unique needs without having to input their company-specific data.
Amazon also released an application, called Code Whisperer, that allows developers to put in a prompt for code. This could be game-changing for developers, who could free up their time for the creative part of the process while Amazon's technology does the actual coding.
AWS has been capturing greater market share and is already the largest cloud-computing company. Sales growth, once reliable as the highest of Amazon's segments, is slowing in this sluggish economy. But between its No. 1 spot and these new applications, Amazon is well positioned to shoot forward when client companies rebound.
No end in sight for new opportunities
One of the most compelling Amazon opportunities right now is in advertising. The company is using sophisticated AI algorithms for pinpoint accuracy, which yields the rights ads for the right customers, resulting in higher conversion rates. It accomplishes this by tabulating hundreds of millions of product-embedding requests every second, and processing them at the same time. It's a bit mind-boggling, which is why it's left to AI, which has bandwidth and capabilities outside of any human, and most technology.
As the largest e-commerce operation in the U.S., Amazon has one of the largest audiences possible for running ads, making its ad business a no-brainer for retailers looking to stimulate sales growth. Ad sales increased 23% over last year in the 2023 first quarter and were the highest-growing category of all of Amazon's businesses. CEO Andy Jassy explained that the ad business is growing because of the machine-learning investments that deliver targeted results for shoppers.
As Amazon continues to rebound and harness new opportunities, it's standing out as an AI stock with a solid track record that you'll want to own going forward.
