Warren Buffett isn't known for his tech investing -- even less so, artificial intelligence (AI) stocks. But right now, Buffett's holding company has bet nearly $2 billion on a business that sits at the center of the AI revolution. Most investors don't realize this well-known company is an AI giant, making the stock a solid long-term bet for those looking to follow one of Buffett's biggest positions right now.
Forget everything you know about Amazon
Most people think of Amazon (AMZN 0.26%) as an e-commerce business. And that's certainly true. Nearly 40% of all e-commerce sales in the U.S. are facilitated through Amazon. And most of Amazon's revenue still is generated from digital retail sales.
But when you look at operating profits, the story shifts dramatically. Most of Amazon's operating profits are generated by its Amazon Web Services division, more commonly referred to simply as AWS. So while AWS contributes less than 20% of total sales, it's the primary contributor of Amazon's profitability.
In recent quarters, AWS has grown its share of Amazon's revenue pie while also demonstrating higher profitability levels. This should come as no surprise, given the massive rise in spending for AI infrastructure. Nearly every AI application requires cloud infrastructure to train and deploy the models necessary to function.
Building out independent infrastructure for every application isn't cost effective. With cloud infrastructure, developers can scale storage and compute demand dynamically, based on their needs and the needs of their customers. The result is a more flexible, capable, and cost-effective back end.
When it comes to cloud computing, scale matters. The bigger a cloud network is, the better it can serve customers through additional data routing options and server capabilities. But cost and access are also key factors. The bigger the scale, the more a cloud provider can scale its fixed costs, passing these savings on to customers.
With greater scale also comes greater buying power. Nvidia's next-gen Blackwell chips -- coveted by nearly every AI developer -- sold out for 12 months last year.
With a leading 30% global market share -- nearly as big as the next two competitors combined -- Amazon's scale gives it durable competitive advantages across the board, especially when it comes to cost, reach, and sourcing high-demand, low-supply chips. Worldwide spending on AI is expected to reach $632 billion by 2028, growing at a rate of 29% annually. Next decade, many forecasts believe the market size will be several trillion dollars.
Already the market leader with sustained profitability, expect AWS to eclipse the e-commerce segment's importance over the next five years.
Image source: Getty Images.
Will Amazon become the next Nvidia?
Nvidia has taken the AI market by storm with its next-gen GPUs. Right now, roughly 80% to 90% of data center GPUs use Nvidia's products. Because the AI industry heavily relies on data centers, Nvidia has become a go-to stock for AI investors. But with such a dominant data center market share, might Amazon be the market's next favorite AI stock?
While the e-commerce division offers huge value, I'm guessing it is the promise of AWS that drew Buffett and his team to the stock. The growth potential is clear, with Amazon in the driver's seat. This growth opportunity should be one of the biggest in company history, able to be sustained for years, if not decades.
Currently, Amazon has a competitive advantage due to scale, while Nvidia's position is mostly due to technological superiority and software lock-in. As previous chip wars have proven, however, competition will rise for Nvidia over time.
Amazon's position, meanwhile, may actually strengthen over time due to compounding scale advantages. That will be doubly true if it can provide mass availability of next-gen GPUs before the competition does.
Already commanding a market capitalization of $2.2 trillion, Amazon won't generate magnificent returns. But growth in AWS makes the stock a long-term buy, with the potential to overtake Nvidia in the years to come.
