The world's leading e-commerce company, Amazon (AMZN 2.94%), announced that it was investing up to $4 billion in a young artificial intelligence company called Anthropic. This news comes just eight months after fellow tech giant Microsoft announced that it was investing an additional $10 billion in OpenAI, the parent company of the generative AI platform ChatGPT.
But with some of the buzz around AI fading, investors are likely asking themselves whether this $4 billion investment is worthwhile. Let's take a look.
What is Anthropic?
Before diving into the terms of the deal and any potential impact it could have on Amazon's business, it's probably best to take a look at what Anthropic really does.
Founded by two former OpenAI executives, Anthropic describes itself as "an AI safety and research company." At its core, Anthropic's technology actually looks fairly similar to ChatGPT in that it offers a chatbot -- named Claude -- that can analyze text and generate responses based on a customer's needs.
Through Claude's technology, Anthropic offers a customer-facing application, as well as a solution that businesses can integrate into their various daily workflows. Anthropic also partners with companies like Zoom and Salesforce's Slack so that their platforms can leverage Claude's casual chatting technology to enhance Zoom's contact center product or summarize lengthy threads in Slack.
While on the surface, Anthropic's AI assistant might not seem too different from others that are available today, the company is focused on making its technology "safer." According to a number of company blog posts, Anthropic trains its AI system based on a set of principles laid out publicly in its constitution. Anthropic has described this focus clearly by stating, "Our long-term goal isn't trying to get our systems to represent a specific ideology, but rather to be able to follow a given set of principles."
Terms of the deal
According to a number of reports, Amazon will be investing $1.25 billion in Anthropic up front, with the potential to invest another $2.75 billion over time if certain conditions are met. Though the valuation for this investment hasn't been disclosed, it will be considered a minority stake (less than 50%) in the company. In addition to Amazon, Anthropic has raised money from several other companies, including the likes of Alphabet and Salesforce, as well as venture capital firms like Menlo Ventures and Index Ventures.
As part of the deal, Anthropic will use a variety of Amazon's own services, including its cloud-computing division AWS for most mission-critical workloads, as well as Amazon's AI-specific Inferentia chips for training its AI models. While Anthropic has already been a partner of AWS since April, Amazon's CEO Andy Jassy seems to believe there is value in a closer partnership, as he stated, "We can help improve many customer experiences, short and long-term, through our deeper collaboration."
What does this mean for shareholders?
Given the size of Amazon's overall business, it'd be hard to imagine that this investment will have any significant financial impact in the short term. However, what's clear is that Amazon's management team is open to spending big sums in order to improve AWS' capabilities. Prior to this announcement, Amazon had not made any major acquisitions or investments that were targeted specifically for the company's cloud computing division, which is the leading profit driver for the company.
Over the last 12 months, despite only accounting for 16% of Amazon's overall revenue, AWS accounted for more than 80% of the company's operating income. However, the company still seems to believe it is early days for cloud spending overall. In an email to employees from 2021, Andy Jassy says, "Less than 5% of the global IT spend is in the cloud at this point. That's going to substantially change in the coming years."
AMZN Cash from Operations (TTM) data by YCharts
Though Amazon has at times been known for spending a little more than it should, big investments like these shouldn't come as too much of a surprise, given the management team's optimism surrounding its AWS segment. Today, Amazon's valuation stands at an enterprise value to operating cash flow multiple of about 23x. While that might not seem crazy cheap, it's well below the stock's 10-year average, and the company has managed to grow its operating cash flow more than tenfold over the last decade.
For now, I think investors should continue to trust the management team and hold their shares, given the company's stellar track record of successfully reinvesting back into the business.
