The launch of OpenAI's generative artificial intelligence (AI) chatbot, ChatGPT, sparked a technology hype cycle that has created boatloads of shareholder returns this year. One big beneficiary of this trend has been Amazon (AMZN 0.81%) with its stock price up by a whopping 62% year to date. Let's explore three fundamental reasons why the e-commerce giant could become a long-term AI winner.
1. It's integrating AI into all its businesses
In business, the flywheel effect occurs when small improvements compound to create substantial long-term gains. Amazon is using this strategy to incorporate artificial intelligence into many aspects of its operations. On the retail side, the company is working on an initiative called Project Nile, which will revamp its e-commerce platform with generative AI capabilities over the coming quarters.
This strategy could include adding things like AI-powered search and a conversational shopping assistant designed to help customers locate and get information about products on the Amazon marketplace.
Management expects these AI efforts to increase conversion rates by encouraging window shoppers to actually make a purchase. The company also plans to use AI to boost its home personal assistant, Alexa, by enabling it to perform advanced tasks like writing notes and entertaining users with jokes and opinions.
Individually, these separate initiatives probably won't add much to Amazon's top and bottom lines. But all together, they could have a sustainable long-term impact.
2. Cloud computing growth could accelerate
While Amazon's consumer-facing AI efforts are somewhat incremental, its enterprise strategy is more transformative. On the cloud computing side, the company claims to provide the "most comprehensive" set of services, tools, and resources for clients in machine learning and generative AI.
Image source: Getty Images.
It focuses on helping businesses build and scale their own consumer-facing applications through tools like Amazon Bedrock. The platform, on Amazon Web Services (AWS), is designed to help clients train large language models (a type of algorithm that can summarize, translate, predict, and generate content) on their own data. Amazon has also created its own purpose-built AI chip called Inferentia, designed to be a low-cost way to train and run AI applications.
In September, the company announced an investment of up to $4 billion in OpenAI competitor Anthropic, which specializes in AI research and developing large language models. Not only does the deal give Amazon access to the start-up's technology (which can be incorporated into Bedrock and Amazon's other AI projects), but it also secures a large and growing client for AWS, which will be Anthropic's primary cloud service provider.
3. Cost-cutting will help support the bottom line
Amazon is in a great position to focus on its new growth drivers because of management's efforts to cut costs in its core e-commerce operations. This involved laying off 27,000 staff and breaking up its U.S. fulfillment from a national network into eight distinct regions to boost efficiency and improve delivery speeds. These efforts have had impressive results.
In the third quarter, operating income soared by almost 350% year over year to $11.2 billion, largely based on better e-commerce margins. While the company's shares are still richly valued at around 40 times forward earnings, future margin improvements and AI-driven growth can help justify the price tag and make the stock look like a long-term buy.
