Investor sentiment has improved markedly in recent months amid cooling inflation, stronger-than-expected economic growth, and excitement surrounding artificial intelligence (AI). After soaring 18% year to date, the S&P 500 (SNPINDEX: ^GSPC) is now just 6% from a record high, the point at which a new bull market definitively begins.
That milestone is meaningful because the index returned an average of 186% in the last nine bull markets, and AI will undoubtedly be a source of momentum through the next one. In fact, Goldman Sachs says generative AI could add $7 trillion to the global economy over the next decade.
Many companies will benefit from that trend, but Amazon (AMZN 0.41%) is particularly well positioned to create value for shareholders. Here's why this growth stock is worth buying.
Amazon is a leader in cloud AI developer services
Investors can think of AI in three layers: the infrastructure needed to train AI models, the models needed to build AI applications, and the AI applications themselves. Amazon Web Services (AWS) says it has the broadest and deepest portfolio of AI and machine learning services at all three layers of the stack.
And IT consultancy Gartner corroborated that assertion in a report published earlier this year. The report recognized AWS as the market leader in cloud AI developer services, citing its "low operational costs and the breadth of its AI services and infrastructure choices" as key strengths.
Accolades notwithstanding, Amazon is still investing aggressively in AI research and development, and it recently debuted two generative AI products: Amazon Bedrock and Amazon CodeWhisperer. Bedrock is a service that provides access to large language models needed to build generative AI applications for text and images. CodeWhisperer is an application that automates portions of the coding process to accelerate software development.
Both products should help AWS capitalize on the growing demand for AI software, an area where Ark Invest is forecasting explosive revenue growth of 42% annually through the end of the decade. But opportunities in AI are only part of the overall investment thesis for Amazon.
Amazon is a triple threat
Broadly speaking, the investment thesis for Amazon centers on its strong presence in e-commerce, cloud computing, and adtech -- three markets forecast to grow at roughly 14% annually through 2030. Amazon operates the most popular online marketplace on the planet, AWS is the global leader in cloud infrastructure and platform services, and Amazon is the world's third-largest adtech company.
More importantly, Amazon enjoys a durable competitive advantage in each of those industries, something Warren Buffett says is the most important quality any business can possess. Amazon has reinforced its leadership in e-commerce with an immense logistics network that allows the company to offer fulfillment services to sellers and fast delivery to buyers. Doing so accelerates the network effect inherent to its business.
Similarly, according to Gartner, AWS offers the greatest breadth and depth of cloud infrastructure and platform services capabilities of any provider, and the company often sets the pace for innovation in the industry. Those intangible assets should keep AWS on the cutting edge of cloud computing for years to come.
Finally, Amazon is quite adept at engaging consumers and collecting shopper data due to the popularity of its online marketplace. Consumers often start their product searches on Amazon rather than a search engine like Alphabet's Google or Microsoft's Bing. That makes Amazon an ideal adtech partner for brands looking to reach prospective buyers, and its appeal should persist for as long as its marketplace remains popular.
Why Amazon stock is worth buying
The retail e-commerce, cloud computing, and adtech markets are expected to grow at roughly 14% annually through the end of the decade, and Amazon should have no problem matching that pace, given its strong presence in all three areas -- not to mention its opportunities in AI software and services. That makes its current price-to-sales ratio of 2.7 look quite reasonable, and it's certainly a discount to the five-year average of 3.5 times sales.
Not surprisingly, this growth stock currently carries a consensus rating of "buy" among Wall Street strategists, according to CNN Business, and the median 12-month price target of $172 per share implies 21% upside from its current price. Of course, Amazon is best viewed as a long-term investment because the market is inherently unpredictable over short periods.
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. Trevor Jennewine has positions in Amazon.com. The Motley Fool has positions in and recommends Alphabet, Amazon.com, Goldman Sachs Group, and Microsoft. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.
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August 10, 2023 at 04:02PM
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