Amazon (AMZN +1.25%) has proven its ability to build leading businesses, with the key examples being its dominance in e-commerce and cloud computing. The company, which first sold books online, expanded over the years into grocery, mass merchandise, and more -- and anchored the business in people's daily lives through its Prime membership program.
As for cloud, Amazon Web Services (AWS) launched in 2006 and has since developed a vast portfolio of services -- in fact, it's the world's biggest cloud provider. All of this has helped Amazon's earnings climb over time, and in each case, the company has benefited from gains in return on invested capital. So, Amazon has demonstrated its ability to make the right moves.
Now, based on a few clues Amazon chief Andy Jassy has given us, my prediction is this will be Amazon's next big move...
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Amazon's return on invested capital
Before we consider my prediction, though, let's catch up on the story so far. As mentioned, Amazon has built two incredibly successful business units over the past several years. In the recent quarter, these delivered $181 billion in revenue, an increase of 17%, and $30 billion in net income. And, over the past decade, every period of spending has resulted in returns in the years that followed.
AMZN Return on Invested Capital data by YCharts
Here, I'll focus on AWS, as the business has benefited from something extraordinary in recent years -- the artificial intelligence (AI) boom -- and this has opened the door to Amazon's next major opportunity. AWS offers a wide range of products and services to customers developing AI projects. At AWS, they may find different categories of chips, such as central processing units (CPUs) that power any type of computer and graphics processing units (GPUs) known for their strength in AI. Customers also may harness the power of Amazon Bedrock, a fully managed service that gives them access to many large language models -- and more. And these are just a couple of examples of the AI offerings customers find at AWS.
In recent times, this AI portfolio has supercharged AWS' growth and helped the business to reach a $150 billion annual revenue run rate.
The next big business
Now, let's consider what I predict will become Amazon's next big move -- and big business. Today, AWS offers customers chips from third parties, such as market giant Nvidia, but it also has developed its own chips -- these are the Graviton CPU and Trainium, a GPU-style product. What's the difference between these chips and those of market giants? They represent a quality option for the cost-conscious customer -- or even customers that invest in the more expensive Nvidia GPU, but, to keep costs down, also rely on more economical options for certain tasks. Amazon says its Trainium2 chip offers a 30% better price performance than standard GPUs.
Demand for Graviton and Trainium has been skyrocketing, with most of these chips reserved or sold out, Jassy said during Amazon's earnings call this week. Today, the annual revenue run rate for Amazon's chips is $20 billion -- but the company says this would be $50 billion if, like Nvidia, it were selling its chips to third parties.
NASDAQ: AMZN
Key Data Points
Why hasn't Amazon already done this?
Now, my prediction is that Amazon's next big move will be to create its own stand-alone chip business and sell to third parties. Why hasn't Amazon already done this? The company first has to ensure it can produce enough capacity for AWS users -- and at the moment, this probably wouldn't be possible.
"We have such demand right now for Trainium, and we have such demand from various companies who will consume as much as we make," Jassy said.
But in the call and in his shareholder letter a few weeks earlier, Jassy's comments about the potential strengths of a stand-alone business suggest that this could be on the horizon for the cloud services giant. So, over the next couple of years, I predict this will be Amazon's next big move -- one that, like e-commerce and cloud computing, may supercharge growth over time. And that makes now a great time to buy and hold Amazon stock.
