The artificial intelligence (AI) revolution is well under way. According to most estimates, the AI market is expected to grow in value by 30% or more per year for the next decade. As with any boom, however, it can be difficult to tell which businesses will ultimately benefit.
This Amazon division is an AI powerhouse
Few laypeople think of Amazon (AMZN +3.47%) as an AI stock. Most don't view it as an infrastructure stock, either. But most of Amazon's operating profit today comes from building and maintaining AI infrastructure. All of it is within a division called Amazon Web Services, or AWS for short. Even if you're familiar with this division, you'll likely be surprised by how dominant it is.
NASDAQ: AMZN
Key Data Points
As of last quarter, AWS commanded a 30% global market share for cloud infrastructure. Nearly every AI business globally relies on cloud infrastructure to train, deploy, and execute its models. Otherwise, these businesses would need to buy, assemble, and run their own compute infrastructure -- a very expensive and slow option. Instead, cloud infrastructure providers like AWS allow AI developers to iterate quickly, spinning up infrastructure as needed on a day-by-day, or even a second-by-second, basis.
It's hard to overstate how impressive AWS' market share is. The next two biggest competitors -- Microsoft and Alphabet -- combine for just 33% of the market. After them, market share drops off a cliff. Fourth-place Alibaba has just a 4% market share. By controlling nearly one-third of the entire global market for cloud infrastructure, AWS has positioned itself as an AI infrastructure leader. Few competitors can match its scale or ability to invest in growth.
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According to research from McKinsey & Co, spending on cloud infrastructure has already exploded. "But with the emergence of generative AI (gen AI)," the company's research concludes, "demand is set to rise even higher." This spending growth will be powered by the rise of AI. McKinsey & Co estimates that around 70% of new cloud infrastructure will be built to serve the specialized needs of artificial intelligence and machine learning businesses.
The latest earnings report from AWS proves that this spending increase isn't just a prediction -- it's a reality right now. Sales for the division grew 17.5% year over year last quarter. Operating income, meanwhile, grew by just 10%. Lower margins, however, were mostly a reflection of Amazon's massive capital expenditures. This year, Amazon expects to spend a record $118 billion expanding its infrastructure to meet the rapidly growing demands of the AI industry.
Should you buy Amazon stock for AWS alone?
Through AWS, Amazon is undeniably at the center of the AI infrastructure boom. But the company isn't comprised of only AWS. There's also Amazon's vast e-commerce business. And while AWS contributes most of Amazon's operating income, most of the company's revenue is still tied to e-commerce -- a business with vastly different economics. Many analysts have even predicted that AWS could be spun off into a separate entity. But for now, the businesses remain under one umbrella, forcing investors to buy both in order to get a seat at the table.
Should you buy Amazon stock just for the AWS exposure? Likely not. Other companies -- like Microsoft and Alphabet -- arguably have a greater focus on AI. Microsoft is heavily invested in Open AI, which operates ChatGPT. Meanwhile, the CEO of Alphabet, the parent company of Google, recently called AI an invention as valuable as fire or electricity. Given their tech-first focus, both companies will be far more invested in the AI boom as a whole than Amazon is overall, given its massive e-commerce exposure.
Still, Amazon will remain an AI infrastructure heavyweight for years to come. And if investors can get comfortable with also owning a sprawling e-commerce division, Amazon stock remains a great way to get instant exposure to one of the best AI infrastructure businesses on the market today.
