Amazon (AMZN -0.57%) isn't the company some people think it is. While some assume it's just an e-commerce giant, others are beginning to realize it's also a major player in the artificial intelligence (AI) computing space. Where it is making inroads here is by entering the semiconductor chipset market.
To compete effectively in this segment of AI, companies are realizing they need to offer custom chips, and Amazon believes it has the potential to do so. Amazon's chip business just crossed a crucial threshold: A $25 billion annual run rate. This is a big deal, as it shows that Amazon's custom chips are catching on with clients.
I think this is a bigger deal than the market gives Amazon credit for, and that lag in understanding makes the stock a great investment opportunity right now.
Image source: The Motley Fool.
Custom chips will drive massive future growth
The cloud computing business started out relatively simply: A company builds computing power to run its operations, creates too much and decides to rent it out to clients to recoup its costs and perhaps generate a profit. Amazon is one of several companies to do this, and it has done it so well that it has turned it into a huge, profitable business segment.
What computing units a company offers can make a big difference in attracting clients. The current industry standard for AI computing is GPUs from Nvidia. Amazon has a ton of Nvidia hardware in its data centers ready to rent. However, GPUs aren't purpose-built for a particular workload. Instead, they are general-purpose workhorses that perform well but could perform better if customized. Furthermore, they aren't cheap, and the cost of purchasing and renting them is quite high.
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Key Data Points
To resolve this inefficiency, some companies are looking at using purpose-built computing units for their AI workloads. Alphabet was one of the first to bring these custom chips to market, and its tensor processing unit (TPU) chipsets are a great example of a custom chip that can deliver results comparable to a GPU at a lower price point. Amazon wants in on that business, so it started offering custom AI chips as well. This business is growing at a triple-digit rate, which is what's pushing up its annual run rate.
Amazon management noted in its most recent shareholder letter that its Trainium2 AI chips offer about a 30% better price-performance than GPUs. It also noted that the product's popularity has helped it sell out capacity. Trainium3, which became available at the start of 2026, sold out a few months ago, and Trainium4 chips, which launch in 2027 or 2028, have also had a large chunk of capacity reserved. There's clearly huge demand for Amazon's custom AI chips, and that will make Amazon Web Services (AWS) a go-to place to build and train AI models.
I think that makes Amazon a smart investment pick in this field, as it's clearly building a strong custom AI chip business that could grow in momentum as AI firms look to optimize their compute spending. Amazon and AWS will cash in regardless of what the trend is, making it a strong stock to consider buying now.
