Amazon Has a Secret Weapon in AI That Makes the Stock a Screaming Buy
Key Points
AWS is a key part of Amazon's business, accounting for the majority of the company's profits.
Amazon's custom AI chip computing capacity is being spoken for as the chips are implemented.
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Amazon (NASDAQ: AMZN) isn't the first company that comes to mind when you think about artificial intelligence (AI), but it probably should be higher up on your investing list. While you may think of Amazon's online store and delivery business as its bread and butter, what really makes the most money is its cloud computing business, which is heavily exposed to AI.
Within Amazon Web Services (AWS) is a segment that's quietly growing its revenue at over a 100% pace, and I think it's a fantastic reason to buy shares of Amazon now.
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Image source: The Motley Fool.
AWS is critical to Amazon's success
AWS may seem like an afterthought in the Amazon investing thesis, but I think it's actually the primary reason anyone should want to invest in the company today. In Q4, Amazon's online stores grew at a 10% year-over-year pace, but over the past few years, it has averaged more like a high-single-digit growth rate. The same can be said for third-party seller services, which usually grow at 10% to 12%.
However, AWS revenue growth is accelerating, and AWS recently posted its best quarter in over three years with a 24% revenue growth rate. Still, AWS only accounted for 17% of Amazon's total sales in Q4. So, why should we be concerned with a relatively small segment of Amazon's business?
What really matters for a company is how much profit a division produces, not revenue. In Q4, AWS generated 50% of Amazon's operating profits. Q4 is a historically strong time for the commerce business, which improves its profitability figures. In Q3, AWS delivered 66% of Amazon's operating profit, so this small segment punches well above its weight.
The reason for recent AWS success all comes from the years of work that Amazon spent on developing custom AI chips. These new chips, known as Trainium and Graviton, grew at a triple-digit rate this past quarter. These chips are likely cheaper to train and run AI models on than GPUs, making them more attractive options to users. Amazon also has new generations of these chips arriving, and much of their computing capacity has already been spoken for. This will guarantee sustained strong growth rates over the next few years for AWS, which in turn means faster profit growth for Amazon overall.
I think this is the growth that Amazon needs to return to being a best-in-class stock. Amazon has largely been ignored over the past few years due to its lack of success in the AI realm, but all of that appears to be changing. I think Amazon is an excellent buy right now, and with the success of its custom AI chips, it could turn into a real AI computing powerhouse.
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Keithen Drury has positions in Amazon. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.
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