Amazon Web Services is benefiting from the AI wave.
Amazon (AMZN 1.19%) may not be the first stock that comes to mind when the words artificial intelligence (AI) are mentioned. However, Amazon is more exposed to this technological wave than most people realize.
Furthermore, Amazon is excelling in its AI pursuits, and I think that makes the stock a no-brainer buy right now.
AWS is benefiting from two technological trends
Amazon and AI are no strangers. AI has already been incorporated across Amazon’s commerce business through its online platform, advertising products, and logistics network. However, the latest wave of generative AI is boosting its cloud computing business, Amazon Web Services (AWS).
Cloud computing providers are massively benefiting from this generative AI trend for a couple of reasons.
First, companies need massive computing power and data storage when they try to create their own AI model. Buying a server dedicated solely to AI modeling isn’t in the budget for many companies that want to dabble in this space, so renting it from a cloud computing provider like AWS is a cost-effective way to gain access to cutting-edge hardware.
Second, business workloads are still migrating from on-site to the cloud. This is a slow transition and can be very tedious. However, with help from Amazon Q (its AI assistant), this migration is made easier.
Cloud computing is expected to boom over the next five years, with Mordor Intelligence projecting that the overall market will rise from $680 billion in 2024 to $1.44 trillion by 2029. With AWS holding the largest cloud computing market share, it stands to benefit from this transition.
AI is boosting AWS to new levels, but how does that help Amazon’s finances out?
AWS is partially to blame for Amazon’s premium valuation
Although Amazon’s commerce divisions make up more than 80% of total sales, AWS accounts for 64% of the operating profits. This means that outsized growth in its AWS division will have an even greater effect on Amazon’s profits.
In Q2, AWS revenue rose 19% year over year, generating an operating profit margin of 36%. That’s an impressive business. If it was a stand-alone business, it would gather a premium valuation. However, Amazon already has a fairly premium price point.
AMZN PE Ratio (Forward) data by YCharts
At 40.2 times forward earnings, Amazon is by no means a cheap stock. This is likely the result of investors being excited about cloud computing and the effect AI will have on it. It also is a recognition that Amazon’s commerce businesses could become far more profitable as it focuses on becoming more efficient.
Over the long term, AWS will be a massive profit contributor and will get a huge boost from all of the new cloud workloads being brought online. This will drive the stock higher, and I think it makes the price tag on the stock worth paying.
Amazon isn’t the first choice for many AI investors, but I think there are compelling enough reasons to purchase the stock now to benefit from the AI wave.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Keithen Drury has positions in Amazon. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.
