Why Amazon Rallied Today
Key Points
Amazon CEO Andy Jassy published his annual letter today.
Jassy gave many reasons to be bullish on Amazon's AI business going forward.
He also devoted a good amount of the letter to Amazon's competitive challenge to Elon Musk's robotics and space ventures.
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Shares of e-commerce and cloud computing giant Amazon (NASDAQ: AMZN) rallied on Thursday, up as much as 5.7%, before retreating to a 4.2% gain as of 1:13 p.m. EDT.
Several AI-related stocks were up today, but Amazon seemed to get an extra boost from CEO Andy Jassy's annual letter to shareholders, which was published this morning.
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Jassy is uber-bullish on AI, takes aim at Elon Musk
Amazon stock has been under a bit of pressure ever since the management forecast spending some $200 billion this year on capital expenditures, largely on AI data centers.
That's an incredible amount of spending that could exceed the company's operating cash flow, and made investors quite nervous. However, if Amazon earns an adequate return on that capital spending, the high investment this year would be super-bullish for the stock.
Two months after that report, Jassy reiterated his enthusiasm for Amazon's AI business, saying:
I've followed the public debate on whether this technology is over-hyped, whether we're in 'a bubble,' and if the margins and ROIC will be appealing. My strong conviction, at least for Amazon, is that the answers are no, no, and yes.
Jassy then revealed a few interesting details. First, Jassy made the point that Amazon Web Services, the first-mover colossus in the cloud computing industry, had just $58 million in revenue three years after it first launched. By contrast, Amazon's AI business is now at a $15 billion run rate, just over three years after the launch of ChatGPT, and is growing rapidly.
Look no further than Jassy's comments on Amazon's chipmaking efforts as an indicator of current demand. Jassy noted that Amazon's custom Trainium3 AI chips, which just began shipping last month, are already fully subscribed. Not only that, but a "significant chunk" of Trainium4, which won't start shipping for another 18 months, has already been reserved by large customers. And the over-subscription doesn't just apply to custom AI accelerators; Jassy also noted that, due to the rebound in CPU demand for inference applications, its in-house CPU chip, Graviton, was sold out. In fact, he said two large AWS customers had asked to reserve all of the company's Graviton capacity this year!
Overall, Jassy indicated that Amazon's chip business would generate $20 billion in revenue if it were a stand-alone business, and $50 billion if Amazon were just a regular chipmaker that sold to third parties.
Needless to say, these data points suggest the $200 billion Amazon is spending this year will be money well-invested.
Image source: Getty Images.
In addition to the AI bullishness, Jassy also took a swipe at Elon Musk's businesses. In the letter, Jassy devoted significant space to both Amazon's robotics and satellite broadband businesses, which will compete with Tesla's (NASDAQ: TSLA) Optimus robots and SpaceX's Starlink service.
Jassy explained that Amazon has 14 years of experience with its warehouse robots, giving it a strong historical expertise and a clear leg up on this potentially large future business. Additionally, Jassy claimed Amazon Leo, Amazon's satellite broadband service that is rolling out this year, will have six to eight times the uplink speeds and two times the downlink speeds compared with alternatives today.
While Jassy didn't directly name competitors, it's pretty clear Jassy is looking to take on Elon Musk's robotics and space ventures, each of which has been ascribed massive future value.
Amazon still seems undervalued
Amazon stock, along with its hyperscaler peers, has been under pressure in 2026 due to both the war and the risks associated with its massive capital spending plans. However, Jassy's letter does a good job of explaining why these concerns are likely misplaced or overdone.
Even after today's rise, Amazon only trades at about 28 times this year's earnings estimates. That's still a low valuation for a company with a strong leadership position in AI computing, along with multiple ways to benefit from the AI revolution.
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Billy Duberstein and/or his clients have positions in Amazon. The Motley Fool has positions in and recommends Amazon and Tesla. The Motley Fool has a disclosure policy.
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