The artificial intelligence (AI) race continues to heat up, and the stakes continue to get higher as the hyperscalers announce ever-increasing investments in their infrastructure.
The latest market sentiment centers around how fast these AI giants, like Amazon (AMZN -2.24%), Meta Platforms, and Alphabet, can recoup their investments, and whether or not that's going to lead to an AI bubble.
Amazon made another announcement this week related to its investments in AI. Management had updated investors in the third-quarter earnings call that it would end 2025 with about $125 billion in AI spending, more than any other cloud provider, and that it would accelerate it in 2026. It just announced the first 2026 deal, for $50 billion. Will that help Amazon win the race?
An Amazon drone. Image source: Amazon.
AWS is the leader in cloud services
Amazon uses AI across its business, but when people talk about this business, it refers to the generative AI it offers clients through the Amazon Web Services (AWS) cloud computing segment. AWS is the largest cloud company in the world, with about 29% of the market, according to Statista.
Although that's a huge amount of market share, accounting for nearly a third of the total, its largest competitors aren't too far behind. Microsoft's Azure has 20%, and Alphabet's Google Cloud has 13%, while a sprinkling of other companies have smaller shares.
As the leader in the industry, Amazon has the first-mover's edge, and it needs to keep investing in this fast-moving space to stay on top. AWS generated $33 billion in revenue in the 2023 third quarter, and it was responsible for 66% of Amazon's total operating income, with $11.4 billion in the quarter. That's a 34% operating margin for AWS, and Amazon can invest those profits in growing the business to new levels.
The AWS client list includes the U.S. government
AWS has Top Secret, Secret, and GovCloud segments that can manage classified information for government intelligence and defense departments, as well as related offices. It's investing $50 billion, starting next year, in expanding its capabilities to service these segments with accelerated supercomputing abilities. It's adding 1.3 gigawatts of AI and data center capacity, widening access to its AI tools like SageMaker and Bedrock, as well as large language models (LLM) like Claude and Nova.
The increased data capacity can help government agencies collect data and process information faster and more efficiently for improved analysis and more accurate decision-making.
NASDAQ: AMZN
Key Data Points
It sounds a lot like Palantir Technologies' Gotham and Artificial Intelligence Platform (AIP) programs. Palantir has been one of the hottest stocks on the market, and Amazon may be leaning into trying to get some of its hypergrowth.
Palantir already partners with AWS, and there may be some cross-deals here, although Palantir wasn't mentioned in the announcement. So while it looks like competition, it could be a mutually beneficial relationship.
Which stocks are poised to win?
Amazon has its finger in many pies, and this is another way to expand its presence and opportunities in a high-growth space. Its AI business has a triple-digit growth rate and is already a multibillion-dollar business.
Defense contracts are usually long term and lucrative, and servicing this market opens more opportunities for Amazon. It's also a boost for Nvidia, which was mentioned in the announcement, since it provides the base infrastructure for AWS' most powerful capabilities.
Amazon stock is still trailing the S&P 500 as the year gets closer to its end, and is up only 4%. This could be an excellent time to buy in for long-term investors.
