Without a doubt, the world of artificial intelligence (AI) revolves around what is known as the “Magnificent Seven.” These elite members, including the likes of Microsoft, Alphabet, Apple, Tesla, Nvidia, Meta Platforms, and Amazon (NASDAQ: AMZN), are at the forefront of shaping the AI landscape in distinctive ways.
While the contributions of Microsoft and Tesla to the AI realm are praiseworthy, there is one standout amongst the elite seven that deserves the spotlight.
Amazon stands tall as the most promising AI prospect among mega-cap tech companies. Let’s delve into why its long-term outlook is as promising as ever.
Amazon’s Strong Financial Foundation
The recent years have proven to be tumultuous for tech firms, especially with the Federal Reserve implementing numerous interest rate hikes due to heightened inflation levels.
This inflationary environment, coupled with rising interest rates, dampened consumer and corporate spending, significantly impacting Amazon’s e-commerce and cloud computing revenue streams.
However, in 2023, a shift occurred. Inflation eased slightly, triggering a resurgence in economic activities.
The revenue from Amazon’s e-commerce, advertising, and subscription services across North America and International segments surged 11% to $484 billion in 2023.
Remarkably, the company recorded positive operating income in these segments, reaching $12.3 billion, a substantial turnaround from the $10.5 billion combined loss in 2022.
Aside from its e-commerce and advertising ventures, a cornerstone of Amazon’s operations is its cloud computing arm, Amazon Web Services (AWS). In 2023, AWS saw a 13% revenue rise to $90.7 billion, constituting nearly 67% of Amazon’s total operating profit.
As the demand for AI applications grows, AWS’s pivotal role in Amazon’s sustained growth becomes increasingly evident.
With a resurgence in sales and a return to positive operating income, Amazon saw a significant uptick in free cash flow, generating $36.8 billion in 2023 compared to a negative $11.6 billion in 2022.
Backed by $86 billion in cash and equivalents, Amazon appears well-equipped to excel in the fiercely competitive AI landscape, drawing the attention of renowned investors like Cathie Wood and Warren Buffett.
Image source: Getty Images.
Amazon’s Strategic Advancements in the AI Space
While Microsoft spearheaded the AI revolution with its substantial investment in OpenAI, Amazon swiftly responded with a $4 billion collaboration with Anthropic, a startup founded by former OpenAI personnel.
This strategic move aims to unlock novel opportunities in the cloud domain. Anthropic will leverage AWS as its primary cloud provider, utilizing Amazon’s proprietary Trainium and Inferentia chips to train forthcoming generative AI models.
These developments bear significant weight and should not be underestimated. Amazon’s ventures in the chip sector could yield substantial dividends as companies seek diversification beyond Nvidia’s semiconductors.
By harnessing AWS, Anthropic is poised to serve as a distinctive lead generator for Amazon’s cloud platform.
Assessing the Investment Prospects of Amazon Stock
An examination of Amazon’s price-to-sales (P/S) ratio places it as the most attractively valued stock among the “Magnificent Seven,” boasting a modest P/S ratio of 3.3.
When juxtaposed against its 10-year high of 5.6, attained just a few years ago, Amazon’s current P/S showcases a favorable valuation metric.
Several factors contribute to this disparity. Amazon’s investment in Anthropic, often overshadowed by Microsoft’s OpenAI deal, and the turbulent economic backdrop marked by inflation and rising interest rates have caused some investors to undervalue Amazon.
AMZN PS ratio data by YCharts.
