3 Reasons Why Amazon is a Top AI Stock to Consider

It's impressive to note that a striking 60% of Amazon's total operating income has come from its cloud computing arm, Amazon Web Services (AWS), over the last year. While many still view Amazon primarily as an online retailer, it is clear that AWS is the jewel in the company's crown when it comes to generating profits. This trend is particularly relevant in the context of the growing importance of artificial intelligence (AI).

Instead of diving deep into complex discussions, let's focus on three key reasons why Amazon is one of the best AI stocks to hold right now.

1. Investment in Data Centers

The advent of AI technology is proving beneficial for efficiency and has the potential to significantly enhance productivity over time. However, such advancements bring challenges, particularly in managing and processing vast amounts of data. This is where Amazon shines. The company currently stands as the world's foremost provider of cloud data services and is committed to maintaining that status.

Amazon has announced plans to invest around $100 billion in constructing over 200 data centers globally over the next decade. This investment will secure AWS's position as the global leader in cloud services. AWS operates on a utility-like model, meaning customers pay for the data they utilize. This model is incredibly advantageous in an era where demand for data is ever-increasing. In the third quarter of 2024 alone, AWS reported a 19% growth, generating $27.5 billion. Over the past year, it has surpassed $100 billion in sales and accumulated $36 billion in operating income. With a surge in demand for AI and an expanded infrastructure, AWS is poised to continue as a key profit driver for Amazon in the foreseeable future.

2. Strong Cash Flow

During the stimulus period of 2020 and 2021, Amazon capitalized on increased consumer spending, paired with low interest rates, resulting in a remarkable surge in operating cash flow. Operating cash flow reflects the cash generated by a company's core business activities, making it a valuable metric for assessing success.

For Amazon, operating cash flow encompasses revenue from product sales, advertising, third-party seller services, and AWS. Although the stimulus years were profitable, Amazon's recent operating cash flow has reached unprecedented heights:

The company generated $113 billion in cash flow over the past 12 months, marking an all-time high that far surpasses the profits seen during the 2020-2021 boom. A significant portion of this increase can be attributed to the uptrend in AWS sales. Given the rising demand for AI solutions, cash flow is likely to continue expanding, enabling Amazon to invest heavily in further growth and maintain its leadership in the cloud market.

3. Reasonable Valuation

In 2024, the S&P 500 index has achieved new all-time highs more than 50 times, leading many companies to be valued quite highly. Nevertheless, Amazon's stock remains attractively priced. Considering its impressive cash flow and earnings, the stock is trading below its five-year historical averages.

Currently, Amazon's price-to-earnings ratio stands at just 37 based on estimated earnings for the coming year. While this might seem steep, it represents a low valuation compared to the company's historical context. Even amidst the broader market's rapid ascent, Amazon presents a compelling value proposition for long-term investors.

There are numerous exciting AI stocks available in the market, and it's wise to build a portfolio with a handful of them. With the surging demand for data, Amazon's robust cash-flow generation, and its reasonable stock valuation, investing in Amazon remains an excellent choice for those looking to invest for the long term.

Amazon, AI, Investing