Amazon (NASDAQ:AMZN) doesn’t thrive only from being the dominant e-commerce player. Cloud dominance makes it the essential infrastructure of the artificial intelligence economy. That in turn makes AMZN stock essential in any long-term investor’s portfolio.
Amazon announced its strategy for generative AI last month at its Re:Invent conference. It invests in silicon, software and generative AI services. Amazon expects to continue over $50 billion per year in capital spending, using $71 billion in operating cash flow.
Analysts expect a big payoff, with earnings per share up 34% in 2024 to $3.45. That would still leave AMZN stock with a forward price to earnings ratio of 46. The current PE is 80. I said it was essential. I didn’t say it was cheap.
What’s in Store for AMZN Stock
Amazon’s AI work is already clear in its operations. This can be both good and bad.
Generative AI has given the Alexa voice interface new skills. Amazon’s store launched a new Fit Insights Tool, with product recommendations, to reduce returns. It’s using AI to help its security teams spot fraud.
Amazon is taken with how AI has helped its fulfillment operations. AI helps Amazon stock products closer to purchasers, sort packages for delivery, and optimize delivery routes. Since half of Amazon’s deliveries are for third parties, this helps the whole industry.
But any tool is subject to misuse. Hackers have used Amazon AI tools to generate fake product listings, products with names like “Sorry, I cannot fulfill this request.” Scammers have also used AI to create fake book reviews, as well as fake books.
This means the Amazon store is becoming its own beta tester. A successful fight against scammers on its own site may encourage enterprise customers to trust its tools. The risk is that the reverse is also true.
What It Costs
Amazon has big plans for its own Trainium AI chip. But for now it is maintaining its close relationship with Nvidia (NASDAQ:NVDA). Amazon makes the numbers work by amortizing investments against a longer useful life. But this carries risk, as anyone holding a five-year-old phone will tell you.
The cost squeeze and necessary accounting gimmicks may slow Amazon’s plans for new data centers, which are mostly in the U.S. While it’s buying land in Indiana, Georgia, Ohio, and Virginia, some of the centers won’t open until 2040.
Amazon’s cloud investments now affect the entire economy. Amazon’s AWS has one third of the global cloud market, half the market share among the top 10 providers.
AWS had $23 billion in revenue in the third quarter and is on track to be a $100 billion business this year, with 24% of that revenue hitting the net income line. Most new centers are in the U.S. because that’s where over half the new customers are.
If you want to get to the heart of America’s economic dominance, this is it.
The Bottom Line
No company in the U.S. is as essential to America’s economic competitiveness as Amazon.Com. No company will be as important in the transition to AI.
Amazon has given away $6 billion in technology service credits to over 280,000 startups. It launched its own accelerator program for generative AI startups last year.
Matt Wood, Amazon’s vice president for AI, says only half the work of AI is in technology. The other half is in culture change.
By sharing its infrastructure with other companies, Amazon created the modern e-commerce economy. It created the modern cloud economy. In leading the move to AI, Amazon will become more embedded in America’s business and social life than ever, whether the company, or the nation, are ready or not .
As of this writing, Dana Blankenhorn had LONG positions in AMZN and NVDA. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
