Amazon (AMZN 0.30%) may not always be at the top of the artificial intelligence (AI) investments list, but it certainly deserves its place there. Amazon may have a bit of a branding problem here, as once people see Amazon, they automatically think of commerce. But the company is a lot more than that.
Despite that association, Amazon is a great AI investment, and anyone looking to devote a portion of their portfolio to AI should highly consider Amazon. Plus, its diversification into other industries makes for a strong pick in general.
Amazon's Anthropic investment is key for survival in cloud computing
The term "AI" is very broad, but it has exploded in use in recent years. That's because AI has shifted from trend-predicting usage to digital assistant thanks to the rollout of large language models (LLMs) like ChatGPT. These generative AI models set the stage for digital assistants that can improve the speed of accomplishing various tasks.
Anthropic is a company with a popular LLM, its Claude model. Amazon has made some significant investments in this company and recently announced that it completed its $4 billion investment with Anthropic. This is key, as it gives Amazon a generative AI partner to complement its Amazon Web Services (AWS) cloud computing product.
Two of Amazon's and Anthropic's primary competitors are Microsoft Azure, which partnered with OpenAI to utilize its ChatGPT model, and Alphabet's Google Cloud, which developed its internal Gemini model. Without a partnership like this, AWS would have looked less attractive than the two smaller competitors and risked losing market share. Now, Amazon has a solid choice for customers to use, keeping it in contention in the cloud computing market.
But that's not the only way Amazon has incorporated AI into its business.
The commerce side of Amazon has used AI for a while
Moving back to a more traditional definition of AI, Amazon has deployed various AI algorithms to solve problems within its commerce division. Through its proprietary packaging decision engine, Amazon developed a model to understand exactly what type of packaging is needed for a product. This cuts waste, as an employee packaging the products may decide to use a larger package when that's unnecessary.
For clothes on Amazon, the company developed an AI model to understand how various products fit based on customer feedback so it can give customers a fit recommendation. This is critical, as it reduces the number of returns and exchanges, which lose Amazon money.
Amazon has deployed AI in several ways to improve the company. With its partnership with Anthropic to ensure AWS has the tools it needs to give clients access to powerful generative AI models, Amazon is a top AI investment candidate.
However, the company has some distance to go before being attractively priced based on conventional valuation metrics.
Amazon's stock looks expensive, but there's a catch
Because there's a lot of transformation going on in the market, using a stock's forward price-to-earnings (P/E) ratio is a good idea, as it considers how much analysts think the company will grow over the next 12 months.
For Amazon, it holds a rather expensive price tag at 44 times earnings.
AMZN PE Ratio (Forward) data by YCharts
With Amazon being priced higher than Nvidia (35 forward P/E) or Microsoft (36 forward P/E), investors might wonder why they should invest in Amazon over those two.
The biggest factor here is that Amazon is still optimizing its profitability on its commerce side. While the North American commerce segment steadily improved profitability in 2023, the international division continued to post operating losses. Furthermore, AWS didn't have a great growth year due to customers optimizing their spending.
As a result, Amazon still has a ways to go before achieving maximum profitability, so taking a P/E ratio at face value is unwise. Because of that, I still think Amazon is a strong investment here, as it continues to improve each of these divisions quarter after quarter. Analyst projections (which are vital for the forward P/E ratio) may be conservative if Amazon can continue to improve the margins on each one of its divisions.
