Amazon(NASDAQ:AMZN) It may not be the first company that comes to mind when you think of artificial intelligence (AI). But it may be necessary. Amazon is one of the most important companies in the AI ecosystem, originating from Amazon Web Services (AWS), a leading provider of AI computing hardware.
There are three reasons why this has caught the attention of investors, and understanding these points may help you position your portfolio for maximum returns.
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1. Amazon’s custom chip business is thriving
Since the beginning of building AI, graphics processing units (GPUs) have been the primary computing chip of choice for AI companies. GPUs are ideal for a variety of workloads, but custom AI chips can be cost-effective when configured for specific workloads. As a result, more companies are moving to custom AI chips, and Amazon is feeling the shift, too.
Amazon designed its own custom AI chip. This is not unusual for Amazon. In 2018, nearly all data center workloads will intel Central processing unit (CPU). Amazon then developed the Graviton chip, which widely replaced Intel products. Currently, 98% of workloads use Graviton chips instead of Intel CPUs.
Amazon believes the same thing will happen in the AI training space, with GPUs widely replaced by custom AI chips like the Trainium series. Amazon is already seeing huge demand for its custom chip business, with revenue growing at a triple-digit pace and nearly all available training capacity for these chips sold out.
If Amazon can capture a large portion of the AI computing market with its chips, profits will increase significantly and Amazon’s stock price will rise.
2. Amazon is spending a lot of money to meet demand
This year, the four AI hyperscalers plan to spend $650 billion in capital expenditures to meet growing demand for AI. Amazon is the biggest spender in this group, with plans to spend about $200 billion this year. Amazon isn’t doing this on a whim. We have already received commitments from major clients to use this computing power. And the faster a business grows, the more a company must spend to meet demand. That’s how cloud computing works.
As demand continues to grow thanks to AI, Amazon will likely have to spend a lot of money for years to come, which may seem like a negative. However, once the initial investment is made and the data center is up and running, the cash flow from these investments far outweighs the short-term expense pain. This allows Amazon to turn these major investments into recurring revenue models that will generate for years to come, making it a great long-term investment in the AI space.
3. Amazon doesn’t charge a high premium
Valuing companies that spend a lot of money on capital expenditures is not easy, as there are several things that can distort traditional earnings metrics. As a result, I think it’s a smart move to value stocks like Amazon based on operating cash flow.
AMZN CFO Price per Share (TTM) Data by YCharts
Amazon’s valuation has fallen significantly in recent years, but it’s still relatively cheap compared to some of its peers. alphabet and apple They trade at approximately 28 and 32 times operating cash flow, respectively.
This removes the notion that Amazon is an expensive stock. That valuation metric is simply skewed by massive reinvestments that should yield big returns in the long run. As a result, we think Amazon is the top AI stock to buy now, as the move to custom AI chips could be the main driver for the company’s stock.
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Keithen Drury has held positions at Alphabet and Amazon. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, and Intel. The Motley Fool has a disclosure policy.
