What Is Amazon Stock’s Outlook As They Embrace Generative AI
Contributor since 2012 / 10805 Followers
Summary:
- Amazon is embracing generative AI in a big way, judging by the company’s recent announcements and management disclosures.
- I expect an improvement in AMZN’s outlook, as the company capitalizes on growth opportunities associated with generative AI.
- I retain a Buy rating for AMZN, as I think that its current valuations aren’t reflective of the company’s full growth potential.
HJBC
Elevator Pitch
I stick with a Buy investment rating for Amazon.com, Inc. (NASDAQ:AMZN) stock.
Earlier, I shared my view that AMZN’s shares can continue to rise as per my prior May 9, 2023, article. Amazon’s stock price rose by +20.0% (source: Seeking Alpha price data) after my previous write-up was published, and outperformed the S&P 500 which was only up +6.7% in the same time frame.
With the current update, my attention turns to assessing the impact of generative AI on Amazon’s outlook. Embracing generative AI should boost AMZN’s growth prospects, but the market has yet to completely factor in Amazon’s more favorable financial outlook into its stock price and valuations. This supports my decision to maintain a Buy rating for Amazon.
AMZN Stock Key Metrics
Amazon is serious about embracing generative AI as evidenced by specific metrics.
Last week, AMZN disclosed that it has established the “AWS (Amazon Web Services) Generative AI Innovation Center” with an initial investment of $100 million as part of efforts to assist clients to “build and deploy generative artificial intelligence solutions.” In its announcement, Amazon also stressed that it has been utilizing AI for a quarter of a century, with its AWS AI solutions having already served in excess of 100,000 clients. This recent development is aligned with Amazon’s financial guidance and the CEO’s comments.
Amazon previously guided at its Q1 2023 earnings briefing that the company’s capital expenditures for FY 2023 will be lower as compared to FY 2022, but AMZN emphasized that “more dollars” (the proportion of its capital expenditures budget) will be allocated to “Large Language Models (LLMs) and generative AI.” Also, Amazon’s CEO Jeff Bezos noted in the company’s 2022 shareholder letter that AMZN is “investing heavily is Large Language Models and Generative AI”, because these areas are expected to be “a big deal for customers, our shareholders, and Amazon.”
In this section, I highlight why I think that AMZN has the ambition to gain a strong foothold in the generative AI space. In the next section, I touch on the actions that Amazon has taken to capitalize on generative AI-related growth opportunities.
How Is Amazon Planning To Embrace Generative AI?
AMZN has introduced new tools for AWS to enable the company’s clients to leverage on generative AI with greater ease and at a lower cost. On the other hand, an improvised AI assistant might help Amazon to grab a greater share of the retail market.
One of the new AWS tools is Bedrock. An earlier April 13, 2023 Seeking Alpha News article mentioned that Bedrock allows AWS clients to utilize “AI-based technologies built by leading AI startups” without the need to invest in and “manage any infrastructure.” Another new AWS tool is known as CodeWhisperer, which Amazon refers to as an “AI coding companion” which claims to deliver benefits such as a higher success rate and a faster rate of coding.
Separately, Amazon shared at the company’s first quarter results call that it is “building one (a newer version of its AI assistant Alexa) that’s much larger and much more generalized and capable” by using the latest technologies relating to LLMs and Generative AI. There could be significant revenue growth potential associated with a higher volume of retail orders executed via a better version of Alexa which facilitates predictive ordering. The estimated Total Addressable Market or TAM for US offline consumable purchases, which is up for grabs by AI assistants, is approximately $1.9 trillion, as indicated in a May 10, 2023 Morgan Stanley (MS) research report (not publicly available) titled “Building JARVIS.”
I outline AMZN’s financial outlook in the subsequent section.
What Is The Future Outlook For Amazon?
The financial outlook for Amazon is reasonably good.
Based on the consensus numbers sourced from S&P Capital IQ, Amazon’s EBIT, normalized EPS, and free cash flow are forecasted to expand by CAGRs of +38.5%, +40.8%, and +29.1%, respectively for the FY 2024-2027 time frame. These are very strong growth numbers, no matter how one looks at it.
Tailwinds relating to generative AI are expected to have a positive effect on AMZN’s prospects as detailed in the next section.
How May AI Impact Amazon’s Business Outlook?
According to Morgan Stanley’s June 21, 2023 report (not publicly available) titled “Why AWS is (Still) Well Positioned To Drive Public Cloud Adoption Through The AI Age”, MS’ analysts note that their base and bull cases for AWS FY 2022-2025 CAGR forecasts are +16% and +24%, respectively. In the June 21, 2023 report, Morgan Stanley noted that the bull case estimates for AWS assume that “AI tools drive new adoption and/or use cases for companies.”
There are good reasons to believe that the actual growth for AWS might exceed expectations significantly. JPMorgan (JPM) recently conducted a survey with 85 CIOs (Chief Information Officers) and published its findings in a research report (not publicly available) titled “Generative AI CIO Survey” published on June 23 this year. The results of this JPM CIO survey indicated that 35 of the 85 CIOs (or more than 40% of respondents) surveyed indicated that they had the intention to spend more on AWS services in the forward three-year period.
Sell-side predictions and corporate surveys as mentioned above have very favorable read-throughs for Amazon relating to the positive impact of generative AI on AMZN’s business outlook.
What Should Investors Consider?
Investors with an interest in Amazon as a potential investment should consider the fact that AMZN’s improved outlook boosted by the rise of generative AI hasn’t been fully priced into the stock’s valuations.
The market values AMZN at 11.8 times consensus forward next twelve months’ EV/EBITDA (source: S&P Capital IQ) now. This implies that Amazon’s current EV/EBITDA valuation metric is just slightly more than half of its 15-year mean EV/EBITDA multiple of 22.2 times.
Is AMZN A Buy, Sell, Or Hold?
I think that AMZN’s shares deserve to be rated as a Buy. Amazon has embraced generative AI as seen with recent news flow and relevant metrics, and this suggests that Amazon’s outlook should improve going forward considering the growth opportunities emerging with the rise of generative AI.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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