Amazon (NASDAQ: AMZN) has a major AI development on the horizon that could significantly impact AMZN stock, but so far only a handful of investors could fully grasp the implications. According to analysts, Amazon currently enjoys a unique strategic position; a position that could potentially make it one of top winners in the generative AI race.
Amazon’s Position in Generative AI
According to Needham Bank analyst, Laura Martin, Amazon could be on its way to winning big with generative AI as it enjoys a very strategic position in that market. For instance, Amazon is currently developing generative AI chips to train and drive better inferences from large language models, or LLMs. Not only that, but it also has the widest variety of choices related to LLMs.
Martin is optimistic that Amazon will be one of the top three winners in the generative AI race since digital markets have the “winner takes most” economics. She also mentioned that AMZN stock has the ability to outperform other stocks as long as it continues to drive upside to its OIBDA and free cash flow estimates.
Needham’s Amazon Forecast
Laura Martin raised her fiscal 2024 profit estimates for Amazon based on CEO Andy Jassy’s shareholder letter, which promised more cost-cutting at Amazon’s inbound fulfillment architecture and inventory placement during fiscal 2024. Additionally, the analyst expects fiscal 2023’s cost-cutting actions to drive margin expansion throughout fiscal 2024.
Martin maintained her revenue estimate at $141.5 billion for the first quarter of 2024, and for fiscal 2024, the analyst maintained her revenue estimate at $636.9 billion. She also maintained her revenue estimate at $713.4 billion for fiscal 2025. Notably, Martin gave AMZN stock a “Buy” rating and a price target of $205, which is an upside of around 14% from where the stock is trading at right now.
How Amazon Plans to Leverage Generative AI
Earlier this month, Amazon’s CEO, Andy Jassy, made some interesting comments in an annual letter to shareholders, noting that Amazon has made meaningful progress in its financial measures and sees considerable upside in each of the businesses in which it’s investing. According to Jassy, Amazon views generative AI as a key foundational element of delivering better customer experiences and plans to deepen its investments in the technology. He also characterized generative AI as a building block that would serve as a foundation for new products and services.
In fact, Amazon disclosed recently that Andrew Ng, the founder of several AI businesses and a managing general partner at the AI Fund, is joining the company’s board of directors. The company noted that Ng will help the board recognize the opportunities and challenges that AI presents, as well as its transformative social and business potential. To sum up, Amazon has pretty much revolutionized the way we shop, and now they’re about to revolutionize their entire business by something way bigger.
Big tech investors would know that large language models are the brains behind chatbots, and training this AI requires some serious computing capacity. Therefore, in order to get that computing capacity, companies invested in AI chips, and a really popular AI chip is Nvidia’s H100, which Amazon buys. However, the online retailer knows that it’s not viable to depend on Nvidia (NASDAQ: NVDA) forever, especially since the H100 demand is so high, which makes the chips hard to get. Subsequently, Amazon started making its own custom-designed generative AI chips, and now it has two which are called Trainium and Inferentia.
Trainium is used for training large language models, with its biggest strengths being speed and efficiency. On the other hand, Inferentia is all about putting those trained AIs to work, so it is optimized for running models smoothly. Therefore, Amazon now can potentially offer its cloud computing service, AWS, a significant edge, and reduce its dependence on companies like Nvidia.
How Amazon Could Benefit from Generative AI
Generative AI can improve Amazon’s internal operations greatly. For example, generative AI could be used to automate tasks like product description writing, generating marketing copy, or even personalizing recommendations for customers. AI could also be used to recommend personalized ads and products to Amazon users, which would definitely boost the company’s advertising revenues and improve customer satisfaction.
Another big area is Amazon’s cloud computing service, AWS. Amazon is a cloud powerhouse, and businesses of all sizes rent computing power from it to run their operations. Now, with the company’s generative AI chips offering faster and cheaper large language model training and inference, AWS becomes even more attractive to other businesses. There’s also Amazon’s strategic AI partnership with Anthropic. In March, Amazon announced that it invested an additional $2.75 billion in the AI startup, completing a $4 billion deal from late last year. Anthropic is the developer of the chatbot Claude, which helps Amazon compete against OpenAI’s ChatGPT, which launched the generative AI craze late in 2022.
Notably, after Amazon announced the deal, Bank of America Securities analyst, Justin Post, wrote that it could help narrow the “perception gap” that Amazon has with Microsoft (NASDAQ: MSFT), the tech giant whose Azure service is the number two cloud-computing provider behind AWS. With that being said, the competition is extremely tough, and Microsoft and Google (NASDAQ: GOOG) both recorded faster overall growth for their cloud businesses in Q4 of last year.
The company’s Prime service also faces competition from retailers like Walmart (NYSE: WMT) and Target (NYSE: TGT), who also launched their own subscription services. Therefore, Amazon needs to offer better deals to its customers in order to fend off the competition.
AMZN Stock Forecast
Amazon has started strong out of the gate in 2024, with its Q4 earnings report in February sending its stock soaring. This could potentially happen again for Q1 this year, as analysts expect the company to post a 12% year-over-year increase in sales, to $142.66 billion. As for the EPS, analysts expect it to rise 167% to 83 cents per share. Additionally, analysts expect year over year sales growth for AWS to accelerate to 14.9%, representing $24.54 billion in sales, which would give the cloud-computing division two consecutive quarters of faster growth for the first time since Q4 in 2021.
Amazon recently started advertising on its Prime Video service, and this caused Jefferies analyst, Brent Thill, to raise his price target to $225 from $190, and set a “Buy rating” for the stock, because he believes this will boost the company’s advertising revenues. Advertising is projected to remain Amazon’s fastest growing division for this quarter, with sales increasing 23.5% year-over-year to $11.74 billion.
There’s a lot of growth opportunities for Amazon, and Wall Street analysts expect AMZN stock to keep gaining. In fact, out of the 63 analysts following the company hold a “Buy” rating. Keep in mind that Amazon is the market leader in e-commerce, as well as cloud-computing through AWS, and it successfully used AI and its booming advertising business to boost its growth. Amazon’s leap into generative AI shows its commitment to innovation, and the potential benefits for its business are undeniable.
Market analysts believe that generative AI will drive companies to spend more on cloud services, and since Amazon is the king of cloud services, it’s obvious who would benefit the most from this trend. There are lots of questions to be answered, especially when it comes to competition with other cloud giants like Google and Microsoft. However, one thing’s for sure is that Amazon’s foray into custom AI chips and generative AI will be a massive move, and it could lead to some interesting developments in the field of large language models.
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