A Once-in-a-Decade Investment Opportunity: My Pick for the Best AI Stock to Buy Now

Andy Jassy, CEO of Amazon (NASDAQ: AMZN), in a recent shareholder letter wrote, "Generative AI may be the largest technology transformation since the cloud (which itself is still in the early stages), and perhaps since the internet." That puts investors in front of a rare opportunity.

Evercore and Morgan Stanley recently selected Amazon as a top pick due in part to its strong positioning in artificial intelligence. Specifically, Mark Mahaney at Evercore says cloud revenue growth could accelerate as Amazon monetizes AI, and Brian Nowak at Morgan Stanley sees the company as an underappreciated leader in AI across cloud and retail.

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Amazon stock has fallen 18% from the record high it reached in February. Admittedly, the market environment is currently complicated by trade tensions and worrisome economic data, which means the stock may not recover anytime soon. But I believe the current share price will look like a bargain in three to five years.

Here's why Amazon is my pick for the best AI stock to buy now.

Image source: Getty Images.

Amazon is using artificial intelligence across its retail, advertising, and cloud computing businesses

Amazon has a strong position in three markets. It runs the largest e-commerce marketplace outside China, supported by a logistics network that handles more volume than FedEx and UPS. It is the third largest ad tech company, and its U.S. market share may exceed that of Meta Platforms by 2030, according to eMarketer. And Amazon Web Services (AWS) is the leading public cloud as measured by customers and revenue.

Amazon is bringing artificial intelligence (AI) to bear across all three segments to generate more revenue and improve efficiency. In fact, Jassy recently told analysts the company has built or is in the process of building 1,000 different generative AI applications for different purposes.

• E-commerce: Amazon uses generative AI to forecast demand and optimize inventory across fulfillment centers. It has added natural language processing to the machine vision robots that sort products in warehouses. And the company leans on AI to optimize last-mile delivery routes, assist sellers in listing items, provide quality customer service, and recommend products on the marketplace.
• Advertising: Amazon offers generative AI tools that help brands create cost efficient advertising content across different media types, including audio, image, and video. In addition, its ad tech software leans on AI to helps brands target advertising content and optimize campaign performance.
• Cloud computing: AWS has designed custom chips called Trainium and Inferentia that provide cheaper alternatives to Nvidia GPUs for AI training and AI inference. The company has also introduced Bedrock, a service that lets developers fine-tune models and build generative AI applications. Finally, Amazon Q is a conversational assistant that helps knowledge workers and programmers work more productively.

Looking ahead, Grand View Research forecasts that through 2030 retail e-commerce sales will increase at 11% annually, digital ad spending will grow at 15% annually, and cloud computing sales will grow at 21% annually. Consequently, Amazon has a good shot at growing revenue in the low- to mid-teen percentages during the same period.

Amazon may struggle in the near term, but the company is likely to beat Wall Street's estimates in the long run

Amazon reported strong financial results last year. Total revenue rose 11% to $638 billion on particularly robust sales growth in advertising and cloud services. Operating margin expanded more than 4 percentage points, and GAAP net income soared 90% to $5.53 per diluted share.

Importantly, CFO Brian Olsavsky on the fourth-quarter earnings call said investments in AI infrastructure and software will be a temporary headwind to margins. So, investors should look for earnings growth to decelerate in the current year, perhaps substantially. That may cause the stock to slide, especially if the company misses consensus estimates. But investors should treat any pullbacks as buying opportunities.

Wall Street estimates Amazon's earnings will increase at 17% annually through 2026. That puts the current valuation of 36 times earnings somewhere between reasonable and expensive. But analysts have consistently underestimated the company. Amazon beat the consensus estimate by an average of 29% during the last six quarters. If the company beats by even half that amount in the next few years, the current valuation will look cheap in hindsight.

That's why Amazon is my pick for the best AI stock to buy right now.

Should you invest $1,000 in Amazon right now?

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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Trevor Jennewine has positions in Amazon and Nvidia. The Motley Fool has positions in and recommends Amazon, FedEx, Meta Platforms, and Nvidia. The Motley Fool recommends United Parcel Service. The Motley Fool has a disclosure policy.