The artificial intelligence (AI) revolution is well under way. The AI market was valued at around $190 billion in 2023. By 2033, however, the United Nations predicts the market will be worth nearly $5 trillion.
Fortunes will be made over this time period, sending investors on a determined search to find the next big AI stock. The overlooked AI stock below, however, may be your best long-term bet.
This famous company is actually an AI giant
Most consumers think of Amazon (AMZN 0.90%) as an e-commerce business. And that's true. Last year, most of Amazon's revenues came from e-commerce sales and support. When you look at operating profits, however, the picture changes. Most of the company's operating profits last year didn't come from e-commerce. Instead, it came from a valuable business segment called Amazon Web Services -- more commonly referred to as AWS.
Last quarter, AWS revenue jumped by 17% year over year. E-commerce sales in North America, meanwhile, rose by just 8%, with international e-commerce sales rising by just 5%. But it's really AWS' profitability that is most impressive. The segment's operating profits last quarter jumped to $11.5 billion, with record operating margins of around 39.5%. Companywide operating profits, meanwhile, totaled just $18.4 billion, making AWS the most critical component to Amazon's near-term and long-term profitability.
What is causing AWS to grow so quickly and experience such impressive profitability? There's one major cause: the rise of artificial intelligence.
AI companies don't typically build out their own infrastructure to train and run their models. Instead, they effectively rent out space from cloud infrastructure providers. Most estimates still peg AWS as the largest cloud infrastructure providers in the world, with a market share of around 30% -- nearly as much as the next two competitors combined. Rising demand and spending for AI services, therefore, result in a direct increase in demand for AWS services.
Image source: Getty Images.
Two reasons why Amazon is your best AI stock pick
A lot of money will be made over the next decade with AI stocks. But as previous cycles like the dot-com bubble have proven, not all AI companies will end up winners. That's what makes investing in Amazon so appealing right now. AWS isn't an idea -- it's a reality. Amazon already has incredible scale in the cloud-computing world, with arguably greater investment power than any of its competitors.
But it's not just Amazon's existing scale that should get investors interested. Due to the size of Amazon's e-commerce division, Amazon's AWS division is arguably undervalued. As one Wall Street analyst commented this week, "We believe AI is a key driver of digital transformation and that AI can help drive AWS growth to accelerate, as the AWS opportunity remains underappreciated." For years, other analysts have been calling on AWS to be spun off into a separate business entity in order to realize its full value.
Whether or not a spin-off occurs, AWS will continue to become a bigger part of the Amazon story. Because AWS has higher margins and growth rates than the e-commerce division, this shift should help the stock's overall valuation. Amazon isn't the trendiest AI stock to buy right now, but it likely offers one of the best balances between risk and reward. The rise of AWS could persist for years, if not decades, generating impressive lifetime returns for patient shareholders.
