Amazon (AMZN 1.92%) isn't the first company you think of when you hear "big tech." Its commerce platform dominates the minds of most consumers, but now that it's mostly mature, it's really not that great of a business to be invested in from a growth standpoint. Instead, its cloud computing business, Amazon Web Services (AWS), is a far more compelling reason.
AWS has some major growth tailwinds thanks to unprecedented artificial intelligence (AI) spending, and it has an unlikely revenue stream in that segment that could lead to the stock producing market-crushing returns over the next few years.
Image source: The Motley Fool.
Amazon is more of a cloud computing company than a commerce company
First, investors need to understand why Amazon is more cloud-focused than commerce-focused. During Q1, 57% of revenue came from North American commerce and 22% came from International, leaving 21% for AWS. That may sound like a counterargument, but that's not what investors care about. Commerce businesses have notoriously thin margins, and investors care more about profits than revenue. During Q1, AWS accounted for 59% of Amazon's operating profits -- a trend that has persisted over the past year.
So, while AWS may not bring in as much revenue as commerce, its superior operating profile allows it to generate the majority of Amazon's profits, which is why it's investing $200 billion into capital expenditures this year -- mostly to build out its data center footprint. Amazon isn't doing this on a whim, either. It already has customers lined up to utilize some of the computing capacity being built out, making this less risky than it sounds.
NASDAQ: AMZN
Key Data Points
Amazon's CEO, Andy Jassy, pointed out to investors in its shareholder letter that the faster AWS grows, the more capital investment is required to sustain that growth. With huge demand upcoming for cloud computing, Amazon is spending big to ensure it stays the top cloud computing provider.
But it also has another factor: custom AI chips. GPU-based training isn't cheap, and it can be inefficient compared to training on something like Amazon's Trainium chips. Jassy said in the shareholder letter that Intel CPUs had been the undisputed standard for cloud computing until Amazon's Graviton chip was released. Now, 98% of workloads are run on Graviton. Amazon sees the same thing happening with custom AI chips, and if it can convince its clients that it's a better way to operate, it could be a major upside for the stock, as its custom AI chip business is currently growing at a triple-digit pace.
If Amazon continues to see strong growth in custom chips and can take market share from GPUs, it could see its growth rate accelerate far beyond the 28% it delivered in Q1. That makes me bullish on its future, and could easily allow it to outperform the broader market over the next decade.
