Andy Jassy Says This Could Be a $50 Billion Business for Amazon
Key Points
Amazon CEO Andy Jassy says demand for the company's chips is incredibly strong.
Its leading Trainium chip focuses on efficiency and could meet the needs of tech companies.
Amazon's stock has underperformed the market over the past year, despite the company's impressive growth potential.
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Amazon (NASDAQ: AMZN) is a company that's done a terrific job of expanding its business over the years. Not only is it an e-commerce giant, but many companies rely on its cloud business, Amazon Web Services (AWS), and that has become a major source of profit for the entire company. Amazon has also gotten involved in robotaxis, grocery stores, and healthcare.
One of its most promising new opportunities, however, could involve selling artificial intelligence (AI) chips.
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Why selling chips could be a huge part of Amazon's business in the future
Amazon's top AI chip, Trainium, was built with a heavy focus on efficiency and scale. It's effectively built by a company that needs to scale AI efficiently, making it ideal for tech companies looking to reduce costs and improve the profitability of their AI ventures.
CEO Andy Jassy stated in the company's letter to shareholders that "there's so much demand for our chips that it's quite possible we'll sell racks of them to third parties in the future." Jassy estimates that the annual run rate for a theoretical chip business could be around $50 billion. That total includes the revenue that the stand-alone business would generate from AWS, but it's nonetheless a positive sign of the type of growth that Amazon is seeing from this area of its operations.
Last year, Amazon reported $717 billion in revenue. If the company generated an extra $50 billion in cash, that would represent growth of 7%. But with a large chunk of that likely related to AWS, the true growth rate would likely be far more modest. However, if the company prioritized that area of its operations, it could become a major growth catalyst in the future.
Amazon's stock looks undervalued
It's a bit surprising that Amazon's stock isn't doing much better given the opportunities in AI. In just the past 12 months, it's risen by around 10% -- far below the S&P 500's 20% gain over that stretch. It's lagged the market, despite the business continuing to grow and expand.
For investors, now may be an ideal time to buy the stock, as it's trading at a price-to-earnings multiple of around 30, which is extremely low when compared to the average stock in the Technology Select Sector SDPR ETF, which trades at a multiple of 38.
Amazon is a beast in the tech sector, and it can be a fantastic stock to just buy and hold for the long term, as it continually reminds investors that it isn't running out of growth opportunities anytime soon.
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David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.
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