Wall Street is fired up about artificial intelligence (AI). Wedbush Securities analyst Dan Ives recently called it the fourth industrial revolution -- the other three were brought on by technologies like steam power, electricity, and the internet -- and he conservatively expects $1 trillion in incremental spending over the next decade.
Ark Invest is even more bullish. Analysts led by Cathie Wood believe AI could be more impactful than the internet, and the firm estimates AI software revenue could reach $14 trillion by 2030, up from $1 trillion in 2021. Former Microsoft CEO Bill Gates expressed a similar conviction, saying that AI is the most transformative technology he has seen in decades.
All signs point to AI changing the course of human history. There will be ups and downs along the way, and naysayers will use the word "bubble," but some people said the same thing about the internet following the dot-com fiasco in 2000. A decade from now, I believe investors will look back and see AI as a once-in-a-generation opportunity. The most prudent way to benefit is to build a basket of AI stocks today.
Here's why Amazon (AMZN 0.40%) belongs in that basket.
Amazon has a strong presence in e-commerce and retail advertising
Amazon has three important growth engines in its e-commerce, digital advertising, and cloud computing businesses. The company already enjoys a strong presence in each market, but strategic investments in artificial intelligence (AI) products and fulfillment infrastructure lay the groundwork for continued share gains in the future.
In e-commerce, Amazon is the most-visited online marketplace in the world. It will account for nearly 39% of online retail sales in Western Europe and North America this year, according to eMarketer. One reason for that success is its expansive logistics network, which lets the company offer fulfillment services to merchants and timely shipping to buyers. Amazon recently moved to a regional fulfillment model that lowers costs and improves delivery times, according to CEO Andy Jassy.
Success in e-commerce gave rise to a thriving ad tech business. Amazon dominates the U.S. retail advertising market, eclipsing the share of its closest competitor by tenfold, and it recently became the third-largest ad tech company in the world. Amazon will bring ads to Prime Video next year to boost growth, and it recently launched an AI-powered image generation tool that simplifies the creation of marketing content.
Amazon Web Services is a leader in cloud AI developer tools
Amazon Web Services (AWS) is the long-standing leader in cloud infrastructure and platform services, and it offers the broadest and deepest suite of AI products on the market. Indeed, consultancy Gartner recently recognized AWS as a leader in cloud AI developer services. That alone positions the company as a long-term winner from AI transformation, but AWS is leaning into the technology with new products like Bedrock and CodeWhisperer.
Bedrock is a cloud service offering customizable large language models that allow businesses to build generative AI applications tailored to specific use cases, such as answering questions or automating workflows. Similarly, CodeWhisperer is a generative AI companion that accelerates software development by automating portions of the coding process. Andy Jassy called each product a "game changer for developers."
Amazon stock trades at a historically cheap valuation
Amazon reported solid financial results in the third quarter. Revenue rose 13% to $143 billion and GAAP net income more than tripled to reach $9.9 billion. Investors can expect similar growth in the future as the company leans into cost optimization in retail and AI product development in cloud computing.
Looking forward, retail e-commerce sales are forecasted to increase at 8% annually through 2030, during which time the ad tech and cloud computing markets are projected to increase at 14% annually. Meanwhile, Grand View Research expects the AI market to expand at 37% annually through the end of the decade. Collectively, those estimates give Amazon a good shot at double-digit revenue growth for many years to come.
Indeed, Morningstar analyst Dan Romanoff expects the company to grow revenue at 11% annually through 2027, a reasonable estimate that leaves room for upside if AWS sees a material acceleration in growth brought on by the AI boom. Either way, the current valuation of 2.8 times sales seems reasonable, especially when the three-year average is 3.1 times sales. That's why this growth stock is a sensible addition to a broader basket of AI stocks.
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. The Motley Fool has positions in and recommends Amazon and Microsoft. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.
