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50 billion reasons why the Amazon story just keeps getting better.
Over the past year, many technology companies have made waves in the world of artificial intelligence (AI). Microsoft really got the ball rolling after an investment in OpenAI, the start-up behind GPT Chat. For a brief moment, it looked like Microsoft might have surpassed its big tech competitors.
However, the e-commerce and cloud computing giant Amazon (NASDAQ: AMZN) has begun to emerge as a formidable competitor in the AI domain. Let’s dig into what Amazon is doing to accelerate its business and explore why now is an incredible opportunity to own shares.
Don’t call it a comeback
The macroeconomy has faced some serious challenges over the past two years, with unusually high inflation and rising interest rates affecting businesses and consumers. Unfortunately, Amazon’s e-commerce and cloud computing operations are not immune to these measures, and the company’s bottom line suffers.
At the end of the first quarter of 2023, Amazon’s trailing-12-month free cash flow was negative $3.3 billion. In fact, the chart illustrates the magnitude of Amazon’s cash burn during periods of peak inflation and slowing growth.
AMZN Free Cash Flow Chart (Quarterly)
However, fast forward a year and the narrative has changed dramatically. In the 12-month period ending March 31, Amazon’s free cash flow was $50.1 billion. Since hitting rock bottom last spring, Amazon has turned around and consistently generated positive cash flow. One of the big contributors to this turnaround is some acceleration in the cloud business in particular.
What has Amazon done to boost its cloud services? Similar to Microsoft, Amazon has made some notable moves in AI.
Image source: Getty Images.
Don’t neglect AI investments
In September, Amazon announced it was investing $4 billion in an AI start-up called Anthropic. Interestingly, Anthropic’s co-founders originally came from OpenAI. Under the terms of the agreement, Anthropic agreed to primarily use Amazon’s cloud infrastructure – Amazon Web Services (AWS).
This is a subtle but profitable component of the partnership with Anthropic because it should help generate new sources of lead generation for AWS. Additionally, Anthropic will also train future versions of its generative AI models using Amazon’s Trainium and Inferentia chips. I see this as another smart move by Amazon.
At present, the AI chip market is dominated by Nvidia. And while Nvidia will likely continue to hold considerable market share, Amazon’s investments in developing its own chips and data centers could unlock more gains in the cloud business in the long term.
The story continues
Amazon Stock Looks Great Value
I think many investors are ignoring Amazon’s progress and thinking too narrowly when it comes to the macroeconomy. The current inflation rate of 3.5% is well above the Federal Reserve’s long-term target of 2%. However, it is important to understand how much inflation has cooled down compared to the peak levels of two years ago.
The graph paints an interesting picture. Amazon’s price-to-sales (P/S) ratio reached a 10-year high in 2020. However, not long after, the company’s P/S ratio began to fall sharply as inflation began to soar. Now, as inflation begins to cool, Amazon’s P/S multiple appears to be normalizing.
AMZN PS Index Chart
What I find fascinating about the dynamics of the chart is that although Amazon’s valuation multiples are rising, they are far from their previous highs. On top of all this, Amazon’s P/S ratio is the lowest among the “Magnificent Seven” peer set. Considering how much Amazon has grown and redefined itself as an AI giant in recent years, I think now is an opportunity to buy some shares at a discount.
I think the growth narrative around Amazon is clear. The company is in the early stages of AI development, but is already making great strides. Given the company’s robust operating image and dominant position in both e-commerce and cloud software, I’m encouraged by Amazon’s momentum and am optimistic that they can continue to do so.
Should you invest $1,000 in Amazon right now?
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Adam Spatacco has positions in Amazon, Microsoft and Nvidia. The Motley Fool has positions on and recommends Amazon, Microsoft and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The motley fool has a disclosure policy.
A Once-in-a-Generation Investment Opportunity: 50 Billion Reasons Why Amazon’s Story Just Keeps Going Better. was originally published by The Motley Fool