"Generative AI has the potential to transform every application,
business, and industry."
-- Amazon Web Services Vice President Swami Sivasubramanian
Artificial intelligence (AI) is already beginning to reshape the world in which we live. Demand for the cutting-edge technology is expected to explode in the coming years, with the AI market topping $1.8 trillion by 2030, according to Statista.
Image source: Statista.
Amazon.com (AMZN 3.43%) intends to capture its share of this booming market. Here are three reasons why the e-commerce and cloud computing juggernaut is likely to succeed.
1. AI is accelerating cloud growth
Recession fears have driven many businesses to temporarily pare back their technology investments. But the shift to the cloud is a powerful global megatrend that's still in its early stages.
Moreover, soaring demand for generative AI applications should help to accelerate near-term cloud spending. A recent survey of 300 large corporate IT buyers indicated that the cloud market is strengthening, with shortened sales cycles and reduced discounts, according to Mizuho analyst James Lee.
"GenAI is driving the next super cycle of cloud adoption that accelerates mass market migration over the next few years since the new technology can only be efficiently deployed in the cloud," Lee said.
In turn, Lee thinks the AI boom could drive 75% of computing workloads to the cloud over the next half-decade, up from 15% today. As the leading provider of cloud infrastructure services, Amazon stands to profit from this long-term trend more than any other company.
2. Automation should boost Amazon's e-commerce margins
In the excitement surrounding generative AI and its potentially transformative impact on the cloud industry, many investors are overlooking the technology's benefits on Amazon's massive retail business. Don't make that mistake.
The company is a leader in advanced robotics and plans to press its advantages over its rivals. CEO Andy Jassy is working to wring costs out of the company's sprawling fulfillment operations. Amazon's investments in automation technology should improve the efficiency of its distribution network and reduce labor costs, both of which could help to drive its profit margins higher over time.
Analysts are beginning to take note of these intriguing possibilities. Wells Fargo analyst Ken Gawrelski, for one, believes Amazon's margins could expand at a quicker pace than many investors expect. He sees the company's operating margin for its North American retail division returning to its pre-pandemic level of roughly 4% by as early as 2025, up from 1.2% in the first quarter of 2023.
Amazon, in turn, is Gawrelski's top large-cap internet stock pick. He expects the e-commerce giant's share price to rise more than 20% to $159.
3. AI could turbocharge Amazon's ad business
As the company's retail business grows, so will its lucrative advertising sales. Already, more than 50% of U.S. consumers start their online shopping search on Amazon's sites, according to eMarketer. Businesses, in turn, are increasingly turning to the e-commerce titan's high-performing ad platform to get their products in front of hundreds of millions of potential customers.
Amazon's ad business is benefiting from multiple trends. Marketers are shifting their spending from traditional broadcast TV and cable to streaming services, due to cord-cutting and the better analytics that internet-connected TV (CTV) can provide.
The company wants to use AI to provide even more value to advertisers. It's investing aggressively in machine learning to display more relevant ads to its customers. Amazon is also developing AI-powered tools to help merchants produce images and videos for their ads.
Additionally, the company is reportedly planning to launch an ad-supported tier of its popular Prime Video streaming service, according to the Wall Street Journal. Bank of America analyst Justin Post thinks that demand would be high for such a service. "In our view, Amazon's user data, existing relationships with retail advertisers, and extensive ad sales teams provide a competitive advantage for monetizing ad-streaming," Post said in June.
