Amazon (NASDAQ: AMZN) isn’t what you think of when you think of artificial intelligence (AI) infrastructure. Most people associate Amazon with its commerce site and delivery services, which is a fair assessment. This part of the business generates the majority of Amazon’s revenue.
However, Amazon’s cloud computing business, Amazon Web Services (AWS), generates most of the profits. This makes Amazon a bit of an under-the-radar AI infrastructure play, and the stock looks primed to skyrocket over the next few months as more people realize how impressive this segment of Amazon’s business is.
Will AI create the world’s first trillionaire? Our team just released a report on the one little-known company, called an “Indispensable Monopoly” providing the critical technology Nvidia and Intel both need. Continue »
Although Amazon has rallied in recent weeks, it’s still a solid buy, as the outlook for the business is strong and its valuation is still reasonable.
In the fourth quarter, AWS accounted for 50% of Amazon’s operating profits despite only making up 17% of total sales. Q4 is by far Amazon’s most profitable quarter for its commerce business, and most of the year looks like Q3, where AWS made up 66% of Amazon’s operating profits. Despite its much smaller size, AWS is a huge profit driver, and it looks to only keep accelerating that way.
AWS posted 24% revenue growth during Q4 — its best in over three years. It’s doing so well that Amazon decided to spend a jaw-dropping $200 billion in capital expenditures to increase its footprint dramatically. While some question that decision, Amazon noted in its shareholder letter that the faster AWS grows, the more it’ll spend. They noted that while spending is high, the long-term benefit to free cash flow is impressive. They also noted that they’re not blindly spending $200 billion; they have customers committed to using the space once it’s available.
That kind of language pretty much conveys that we’re going to see accelerating growth rates from AWS. Because AWS makes up the majority of Amazon’s profits, this will translate into rapidly rising profits as well. That’s a one-two punch that investors love to see, and it could send shares skyrocketing. However, over the past month, Amazon’s stock has risen nearly 20%. While it would have been better to invest a few weeks ago, the reality is that Amazon’s future is bright, and the price isn’t expensively valued.
