The euphoria surrounding artificial intelligence (AI) is in full swing. Both S&P 500 And Nasdaq Composite The indices are trading near record levels and many on Wall Street are expecting further gains.
Some of the hottest names in AI include the “Magnificent Seven” stocks – a catchy nickname used to collectively describe mega-cap giants Microsoft, alphabet, Nvidia, Apple, Metaplatforms, TeslaAnd Amazon (NASDAQ:AMZN).
Microsoft and Nvidia are considered two early darlings of the AI revolution. But e-commerce and cloud computing leader Amazon has quietly been making some notable strides of its own.
Brian Nowak from Morgan Stanley He recently raised his price target on Amazon shares to $215 – representing an upside potential of around 15% as of the April 10 close.
Let’s explain why now could be a great opportunity to buy Amazon stock.
Cash flow is king
The last few years have been challenging for Amazon. The macroeconomy has been plagued by unusually high inflation, prompting the Federal Reserve to impose a series of aggressive interest rate hikes.
The combination of persistent inflation and rising borrowing costs has had a significant impact on both consumers and businesses. As a result, Amazon’s e-commerce and cloud software businesses experienced stagnant growth as businesses and consumers restrained spending.
Nevertheless, Amazon’s management has adapted and proven that the company can thrive even in difficult economic times. In 2023, inflation began to cool while artificial intelligence (AI) was all the rage in the technology sector.
Amazon’s growth began to accelerate again – but it was the company’s profitability profile that really shined.
In 2023, Amazon generated a staggering $36.8 billion in free cash flow. This is what is left of cash flow after operating costs and capital expenditures. This is quite a turnaround considering Amazon burned through $11.6 billion in cash the year before.
The most pleasing thing about Amazon’s consistent and increasing cash flow is that it comes from different areas of the company.
Amazon divides its online, store and advertising businesses into North American and International geographic categories. In 2023, the combined operating profit of these segments was $12.2 billion – a significant reversal from a combined operating loss of $10.6 billion in 2022.
But it was Amazon’s cloud business that really helped the company return to profitability. Amazon Web Services (AWS) revenue increased 13% year-over-year to $90.6 billion in 2023, while maintaining an impressive operating margin of 27%.
Amazon’s strong performance in high-growth markets combined with its robust cash flow profile sets the company apart from its competitors. No wonder the company has earned a place in the portfolios of Cathie Wood and Warren Buffett.
While there was a lot to celebrate in 2023, Amazon isn’t resting on its laurels. Smart investments in artificial intelligence (AI) could be the key to the company’s next phase of rapid growth.
Artificial intelligence (AI) is a huge opportunity
With its investment in OpenAI – the developer of ChatGPT – Microsoft really started the AI revolution. The move was the impetus for more aggressive spending in the AI space, particularly by big tech companies.
Amazon followed Microsoft with its own investment in a rival platform called Anthropic. Under the agreement, Anthropic will use AWS as its primary cloud service provider. This is a big deal and should not be underestimated. The partnership with Anthropic could represent a new wave of lead generation for AWS and serve as a catalyst for accelerated further growth – both in revenue and bottom line.
Additionally, Anthropic will also use Amazon’s in-house Trainium and Inferentia chips to develop and improve its generative AI models. This is a subtle opportunity that investors should keep an eye on. The semiconductor market is currently dominated by Nvidia modern micro devices.
However, Amazon’s foray into the chip market could be a lucrative opportunity in the long run as the company looks to revolutionize multiple facets of the AI space.
A great review
The chart below compares Magnificent Seven stocks based on price-to-sales (P/S) ratio. Amazon’s P/S of 3.4 is by far the lowest in this cohort.
In my opinion, Amazon’s position in the AI landscape is misunderstood. Unlike Amazon, there are very few companies that can benefit from artificial intelligence (AI) in multiple ways.
Given that Amazon’s businesses span e-commerce, cloud computing, advertising and streaming, there are numerous opportunities for the company to use AI across its ecosystem. This could lead to a new phase of exponential sales and profit growth.
Given Amazon’s lower valuation relative to peers, I think there’s a great opportunity to pick up some shares now as the secular themes of artificial intelligence (AI) continue to gain traction.
Should you invest $1,000 in Amazon now?
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Adam Spatacco has positions at Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla. The Motley Fool recommends the following options: long $395 January 2026 calls on Microsoft and short $405 January 2026 calls on Microsoft. The Motley Fool has a disclosure policy.
A Unique Investment Opportunity: 1 Warren Buffett and Cathie Wood’s Artificial Intelligence (AI) Stock to Buy With All Itself Before It Surges 16%, According to 1 Wall Street Analyst originally published by The Motley Fool