Artificial intelligence (AI) has emerged as a transformative force in the modern economy and is rapidly revolutionizing industries and businesses across the world. Not surprisingly, AI has also become a highly lucrative investment theme and has captivated the minds of both seasoned investors and newbies alike. With several market intelligence firms expecting the AI market to be worth at least $1 trillion by 2030, the relevance of this investment theme will also increase in the coming years.
"AI is probably the most important thing humanity has ever worked on. I think of it as something more profound than electricity or fire," said Sundar Pichai, CEO of Alphabet, the parent company of the Google search engine, in a 60 Minutes interview. Although this may seem like an exaggeration, it may ring true in the coming years.
Several companies are benefiting significantly from this trend. Amazon (AMZN 3.43%) is one of these companies and boasts extensive AI capabilities, including product discovery and inventory forecasting algorithms for its huge e-commerce business and its Bedrock service for enabling its cloud computing customers to build generative AI applications. Shares of Amazon have gained nearly 91% in the past year, but there is still plenty of runway left for the stock.
Global leader in cloud computing
Amazon Web Services (AWS) continues to dominate the global cloud infrastructure space, with 31% market share. Although its year-over-year revenue growth has slowed down over the past few quarters, the sticky customer base and long-term customer relationships can help maintain its leadership position in the coming quarters.
Although organizations are still optimizing their cloud spending, AWS was successful in securing agreements with multiple clients such as Salesforce, BMW Group, Nvidia, Hyundai Motor, Merck, and Amgen in 2023. The company also saw existing customers renewing contracts for larger commitments and longer time frames in 2023, as businesses continue to migrate workloads to the cloud.
Increasing adoption of AWS' generative AI capabilities is also proving to be a major growth catalyst. AWS offers customers, who are building their own AI models, computation power with Nvidia chips. Furthermore, to provide improved performance at a lower cost for AI workloads, the company has built custom AI chips, Trainium and Inferentia, for training large language models.
AWS provides its Bedrock service to companies that are working on customizing existing large language models with their proprietary data. Bedrock is already seeing robust adoption among AWS customers. Finally, AWS also offers various generative AI applications to its customers. Prominent among them is Amazon Q, a coding companion and expert on AWS developed mainly for enterprises to streamline their activities and improve overall productivity.
AI-powered improvements in the retail business
Amazon's relentless focus on customer experience, operational efficiency, and strategic investments in AI technologies is playing a pivotal role in transforming its e-commerce business. The company managed to report the fastest-ever Prime delivery speed in 2023, while also reducing the cost to serve for the first time since 2018. These improvements can be attributed to the success of Amazon's regionalization strategy, wherein the company has restructured its delivery network to store products closer to customers. Amazon has also been leveraging predictive analytics and machine learning algorithms for optimal demand and inventory forecasting.
Amazon has invested extensively in developing generative AI applications to help enhance product discovery on its online platform and personalize the shopping experience for its customers. The company has launched a generative AI-powered shopping assistant called Rufus, which provides tailored product recommendations and answers queries to streamline the customers' shopping journey. This can help further boost user engagement levels and improve purchase conversion rates.
Unraveling a new advertising opportunity
Amazon considers its advertising business a significant avenue for revenue generation. The company saw 26% year-over-year growth in its advertising business in the fourth quarter of fiscal 2023 (ending Dec. 31, 2023), driven mainly by sponsored ads. The company is using machine learning algorithms to deliver relevant, helpful, and personalized advertisements to customers that align with their preferences and previous search queries, all while balancing the ad load (the number of ads shown on the page).
Amazon is also focusing on sponsored TV advertising in the U.S. By providing brands with a self-service solution to create streaming TV campaigns without any requirement of minimal spending, the company is aiming to rapidly penetrate a broad customer base. Brands are increasingly adopting streaming TV advertising to reach viewers across platforms such as Prime Video, Twitch, Freevee, and Fire TV.
Valuation is still reasonable
Amazon is currently trading at 3.2 times trailing-12-month sales and 2.9 times forward sales.
Considering the multiple secular tailwinds in online retail, cloud computing, and digital advertising driving Amazon's growth prospects, this valuation seems quite low. Hence, it will make sense for retail investors to start at least a small position in this stock and hold it forever.
