Analysts at Bloomberg Intelligence believe the generative artificial intelligence (AI) market could grow at a 10-year compound annual growth rate (CAGR) of 42% to $1.3 trillion as companies implement the tech in automation, product creation, and different types of software.
So far, Nvidia has benefited hugely from the trend, selling the computer chips used to train and run these complex models. But e-commerce giant Amazon (AMZN 3.43%) is taking a different approach by trying to become the cloud service provider of choice for AI-related enterprises. Let's explore how this strategy could create value for investors.
Amazon wont be left behind
The 2022 launch of ChatGPT set off an AI arms race among top technology infrastructure companies like Alphabet, Microsoft, and Amazon, which are all seeking to capitalize on the new opportunity. Microsoft scored an early win with its partial ownership of OpenAI, the creator of ChatGPT, while Alphabet's massive search business allowed it to seamlessly incorporate generative AI into its Google search results.
But instead of letting itself get left behind, Amazon is leaning into its advantages in cloud computing to stake its claim on the industry.
In September the company announced the general availability of Bedrock, a service designed to help enterprises build and scale customized generative AI applications within the Amazon Web Services (AWS) ecosystem. This platform benefits from AWS's dominant 32% market share in cloud computing, which can make it a one-stop for all its client's infrastructure needs. The company also invested $4 billion in AI start-up Anthropic, a ChatGPT competitor focusing on AI safety research and developing language models.
The deal could give Amazon exposure to the start-up's growth, as well as a promising customer for its AI-related services.
Don't forget Amazon's other businesses
While AI is a promising growth opportunity for Amazon's AWS business, investors shouldn't lose sight of the tailwinds impacting its retail operations. In the second quarter North American e-commerce sales grew 11% year over year to $82.5 billion. But segment operating income surged to $3.2 billion, up from a loss of $627 million in the prior year period. This is thanks to the company's aggressive cost-cutting efforts, which saw it streamline its fulfillment network and lay off 27,000 staff in 2023.
Image source: Getty Images.
While Amazon's international e-commerce business is still unprofitable, the company managed to cut its operating loss by around half to $895 million. This segment has historically been a money pit. But investors should consider it a long-term bet on the future, because less developed countries like India won't be "poor" forever. And they could represent Amazon's next leg of long-term e-commerce expansion when markets like the U.S., Europe, and Japan peak.
How about the valuation?
With a forward price-to-earnings (P/E) multiple of 40, Amazon stock is not cheap compared to the S&P 500 average of 25. However, the valuation makes sense considering that it is a blue-chip company with a diversified business model and plenty of long-term catalysts for success.
AI adoption could boost growth in Amazon's AWS segment, while cost-cutting and operational efficiencies could turn its e-commerce segment into a sustainable cash cow. Shares look like a buy.
