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Let’s be clear. Artificial intelligence, or AI, represents a great opportunity and many corporations can benefit from this technological revolution. Some chip makers, software developers, knowledge media operators and many others are expected to be big winners from increased investments in AI.
That said, if I had to pick just one stock to invest in AI, it would be Amazon (AMZN 0. 47%). It offers an excellent combination of growth outlook and security, and there are strong arguments that it is currently the best option. Interesting valuation of mega-cap tech stocks.
Amazon’s e-commerce business is so big that it is larger than its next 10 competitors combined. And despite the massive scale, it continues to grow. In the third quarter of 2023, the most recent to be reported, sales in the e-commerce business grew by 9% year over year in North America and 12% year over year internationally. And this was in a year when many were worried about consumers cutting back on spending.
Still, there may still be a lot of expansion ahead. The overseas aspect of its e-commerce business is the fastest growing, although it now only accounts for around 27% of its total sales volume. Furthermore, according to the Census Bureau, e-commerce today represents only 16% of retail sales in the United States, and that percentage has been expanding for years.
AI has several big applications in Amazon’s e-commerce business. Just to name a few, it allows the company to do a better job of personalizing product recommendations, and it allows Amazon to more effectively target advertisements, as ad revenue is a major growth driver for the company right now.
While it isn’t quite as dominant as Amazon.com is in e-commerce, Amazon Web Services (AWS) is the market leader in cloud services.
AWS is the fastest-growing component of Amazon’s business, growing 19% year-over-year in the recent quarter. And AWS is not only developing rapidly, but it is also very cost-effective. It posted an operating margin of 38% in the third quarter, compared to about 6% for North American e-commerce.
The cloud computing market is expected to roughly triple through 2032 from 2024 levels, according to Fortune Business Insights. AI and device learning are expected to play a vital role in this. For example, on the day I write this, AWS just announced a partnership with venture capital firm General Catalyst to expand AI teams for the healthcare sector.
AWS offers several types of AI to customers, adding Amazon Q Customizable AI Assistant for Business, Amazon Transcribe Text-to-Speech, and Amazon Fraud Detector powered by AI, to name a few.
Not only is Amazon’s business growing, but it is becoming more efficient — a big focus of CEO Andy Jassy. Overall revenue grew 11% year over year in the latest quarter, but earnings per share grew by 52% and free cash flow more than doubled. The combination of growing revenue, especially on the AWS side, and management’s continued focus on profitability could keep EPS growth elevated for years to come.
Amazon isn’t exactly a cheap stock at about 37 times forward earnings, but with rapidly expanding profitability and a big growth opportunity ahead, I believe you get what you pay for. Amazon is one of the cheapest Magnificent Seven stocks on a P/E basis and has seen the smallest expansion of its price-to-sales ratio from five years ago.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Matt Frankel holds positions at Amazon. The Motley Fool publishes and recommends Amazon. The Motley Fool has a disclosure policy.
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