Amazon (AMZN +0.83%) is one of the strongest overall players in artificial intelligence (AI), and the AI revolution has played a huge role in powering the overall stock market's gains over the last half-decade. The company has recently surged higher thanks to AI-related developments, and its share price is up roughly 28% over the last three months. On the other hand, the tech giant has actually significantly underperformed the broader market over the last five years.
While the S&P 500's level has risen roughly 78% over the stretch and delivered a dividend-adjusted total return of 91%, Amazon stock has climbed only 64% over the same period. Even though some solid growth is already priced into the company's valuation, there are good reasons to think the market is significantly underestimating Amazon's opportunities in artificial intelligence.
With that in mind, read on for a look at three ways Amazon has to win with AI over the next decade and beyond.
Image source: Getty Images.
Amazon has been working on its own custom AI semiconductor designs for years, and there are clear signs that the company's big bet on custom semiconductors is on track to yield a powerful new growth driver for the tech giant. In April, Meta Platforms announced that it had entered into a partnership to secure access to millions of Amazon's Graviton5 cores.
Meta's move to heavily use Amazon's Graviton5 processors is particularly notable, given that the social media giant has also been pursuing its own custom chip development. The partnership looks like a huge win for Amazon's chip design business and paints a promising picture for the future. In addition to inviting further sales opportunities with third-party customers, the strength of Amazon's custom chips bodes well for its internal tech stack.
While Microsoft and Alphabet have gained significant market share in the cloud infrastructure services market, Amazon Web Services (AWS) remains the overall industry leader. Revenue for Amazon's cloud segment increased 28% year over year to $37.59 billion in the first quarter, beating the average Wall Street analyst estimate of $36.64 billion.
The growth rate for the segment came in at its highest level in three years — a strong indication that AI-related demand is powering increased utilization across the AWS network. With more AI applications being developed, launched, and scaled, Amazon is poised to be a winner.
Even though AWS accounted for only 20.7% of total sales in the first quarter, the unit accounted for the majority of the company's overall profits in the period. With growth for AWS now significantly accelerating again, that paints a promising picture for investors. AWS continues to be the company's biggest profit driver, and the outlook for earnings expansion improves as the cloud infrastructure business accounts for a larger share of overall revenue.
Amazon runs the world's largest online retail business by revenue. Thanks in large part to its control of the world's leading e-commerce portal, the company has also built a fast-growing, highly profitable digital-advertising business. There's a good chance that the continued evolution and integration of AI technologies will have profoundly positive effects on Amazon's e-commerce and digital-advertising ecosystem.
By leveraging AI-powered robotics and automation technologies, Amazon's historically low-margin online retail business could see efficiency improvements that drive significant earnings growth. As more elements of the company's warehousing and delivery operations are automated, it has opportunities to generate far greater profits from its massive online retail sales base.
Meanwhile, AI technologies will likely continue to drive strong sales growth and profitability for the digital-ads business tied to the company's market-leading e-commerce platform. Sales for the advertising segment increased 24% year over year to reach $17.24 billion in the first quarter, and continued AI integration and the benefit of controlling the world's largest e-commerce network by revenue should help the company continue gaining market share in the digital-ads space.
Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Meta Platforms. The Motley Fool has a disclosure policy.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
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