The generative artificial intelligence (AI) market could increase by 42% annually to reach $280 billion by 2033, according to Bloomberg Intelligence. One prudent way to capitalize on that tailwind is to buy and hold a basket of AI stocks. Argus analyst Jim Kelleher recently argued that Amazon (AMZN 2.42%) is an AI stock that "warrants long-term accumulation in most equity accounts."

Here's why investors should run with that advice.

Amazon showed a resurgence of strength in the second quarter

Amazon struggled through the economic doldrums of the last few years, seldom giving shareholders cause to celebrate. But the company regained some momentum in the second quarter. Revenue rose 11% to $134 billion, an acceleration from 7% growth in the prior year, and cash from operations soared 84% to $16.5 billion.

Amazon is not out of the woods where the economy is concerned. Inflation remains elevated, and experts have mixed opinions about whether the U.S. is headed for a recession. But the recent quarter was a reminder that Amazon is a formidable company with a bright future.

Amazon is a major player in three growing markets

Amazon has a strong foothold in e-commerce, digital advertising, and cloud computing, three markets expected to grow quickly in the coming years. Specifically, Amazon operates the most-visited online marketplace in the world, and its market share in North America and Western Europe is projected to reach a new record high of 38.7% this year.

Popularity in digital retail laid the foundation for a fast-growing adtech business. Amazon has a somewhat unique ability to engage shoppers and source data from its marketplace. That advantage has helped the company become the third-largest digital advertiser in the world, behind Alphabet and Meta Platforms. Its market share is expected to reach a new record high of 7.3% this year.

Finally, Amazon Web Services (AWS) is the most popular cloud computing platform. Its market share in cloud infrastructure and platform services held steady at 32% in the second quarter, putting AWS 10 points ahead of Microsoft and 21 points ahead of Alphabet.

Argus analyst Kelleher provided upbeat commentary on all three Amazon business segments in a recent note to clients. But he was especially bullish on AWS because its cloud leadership leaves the company "uniquely positioned in the burgeoning AI-as-a-service market."

Amazon Web Services (AWS) is a leader in AI

Investors should look at AI as a three-layered technology stack involving infrastructure, models, and applications. Powerful computing infrastructure at the base layer is required to train and run inference on the AI models in the middle layer, and those models then confer decisioning capabilities to applications in the top layer.

AWS says it provides the broadest and deepest portfolio of AI and machine learning services at all three layers of the stack, an opinion that independent research company Gartner recently validated to some degree when it recognized AWS as a leader in cloud AI developer services. That commendation comes on the heels of a previous report in which Gartner praised AWS for having "the greatest breadth and depth of capabilities of any provider" in the cloud market.

AWS is pressing its advantage and leaning into demand for generative AI by bolstering its AI stack from top to bottom. Here are a few examples:

  • Infrastructure: AWS provides access to the latest H100 Nvidia graphics processing units, chips widely considered the gold standard in AI infrastructure. However, the company is also designing its own chips for AI training (Trainium) and inference (Inferentia).
  • Models: AWS recently launched Amazon Bedrock to simplify the development of generative AI applications. The service allows businesses to customize pretrained models created by Amazon, and partners like Stability AI, then incorporate those models into private applications.
  • Applications: AWS recently launched CodeWhisperer, a generative AI application that helps developers work more efficiently by automating undifferentiated portions of the code-writing process.

Here's the upshot: Generative AI promises a step function increase in labor productivity, and businesses are eager to incorporate the technology into their workflows and products. As a recognized leader in cloud computing and AI developer services, AWS is ideally positioned to benefit from the growing demand for generative AI.

Why Amazon stock is worth buying

Straits Research says online retail sales will compound at 8% annually through 2030, and Grand View Research expects the ad tech and cloud computing markets to grow at roughly 14% annually during the same period. Those forecasts suggest that Amazon has a good shot at growing revenue by around 12% annually through the end of the decade, give or take a few percentage points. However, revenue could grow more swiftly if its generative AI ambitions really take flight.

In any case, that baseline estimate makes its current valuation of 2.6 times sales look reasonable, especially when the five-year average is 3.5 times sales. That's why investors would do well to build a position in this AI growth stock through dollar-cost averaging.