Up just 4% for the year, is the market missing something for Amazon shares?
Over time, Amazon (NASDAQ: AMZN) has made some shareholders very rich. Amazon’s shares are up a respectable 49% over the past five years – but since the company’s IPO in 1997, the share price gains have come to an end. 263,000%!
Over the long term, the growth in Amazon’s stock price reflected excitement about its future business growth prospects more than the money it was making at the time.
So, it seems odd that the past year has seen stock market excitement about AI – yet Amazon shares are up just 4% in the past 12 months.
After all, while AI investors have zoomed in on stocks like Nvidia (up 28% year-on-year), Amazon is already on its way to becoming one of the biggest AI companies in the world.
Doesn’t the market have that?
It’s an expensive business to be in
Probably not, actually.
Nvidia and Amazon are in some cases on opposite sides of the deal when it comes to outsourcing AI data centers. Nvidia rides high because it sells more of its chips at higher prices, with more profit margins.
Amazon, in contrast, has to spread the cash on a large scale to buy large quantities of expensive chips as it aims to increase its data center footprint.
There’s more to the story than that, honestly.
Through its Annapurna Labs subsidiary, Amazon has leveraged its in-house chip design capabilities to help it cut the price it had to pay third-party vendors like Nvidia as it expands its AI capabilities.
This is a big business in itself: Amazon’s daftly named Trainium2 The chip is already a multi-billion dollar business on its own.
Such chips have also helped Amazon secure investments in leading AI businesses including Anthropic. Those investments can be very valuable. Indeed, Amazon booked a pre-tax profit of $9.5bn in its recently reported quarter on such investments.
Still, there’s no getting away from the fact that — largely because of its AWS subsidiary — Amazon is on the verge of spending big on AI infrastructure that has yet to prove its long-term value.
Another story of Amazon’s growth
However, that “to build they will come” The approach has been a consistent feature of Amazon’s incredible value creation for shareholders over the past three decades.
We’ve seen that in everything from automated distribution centers to startups Amazon Prime and the Prime Air cargo plane.
AI is now central to Amazon’s vision for its future. As the company’s CEO told investors in the fall, “we continue to see momentum and strong growth across Amazon as AI drives meaningful advances in every corner of our business“.
AWS alone is growing at about 20% per year. In addition, Amazon’s broader business continues to have a strong competitive position due to its large customer base, advanced economies of scale, and proven business model.
Amazon shares are currently trading at 34 times earnings. The use of big AI brings risks, so I’m not ready to invest yet.
But I think the market may be missing how AI can be transformative for Amazon. This year, I will closely monitor the stock price and business performance.
