Generative AI sales could jump 2,040%: My pick for the best AI stock to buy now (hint: not Nvidia)

In late 2022, the digital assistant ChatGPT popularized generative artificial intelligence (AI), which uses machine learning models to create media such as text, images, and videos. Since ChatGPT hit the market, companies in every industry have invested aggressively in generative AI, hoping to increase worker productivity through automation.

Chip maker Nvidia benefited greatly from this development. Its revenue has nearly tripled over the past year due to unprecedented demand for its data center GPUs, and its stock price has risen 145% over the same period. However, investors who missed out on those gains didn’t miss out on cashing in on the AI ​​boom.

Bloomberg Intelligence projects that generative AI sales will grow 2,040% to $1.4 trillion by 2032, reaching 41% annually. This rising tide will lift many companies higher in the next decade, but Amazon (AMZN -1.26%) should be a major winner. Here’s why.

Amazon is investing in artificial intelligence in its three main businesses

Amazon has a strong presence in three fast-growing markets. Measured by revenue, the company leads the most important e-commerce market in North America and Western Europe. It is the third largest digital advertiser in the world and the largest retail media advertiser. And Amazon Web Services (AWS) is the dominant public cloud in terms of infrastructure and platform services.

Amazon uses artificial intelligence (AI) to improve efficiency and create new revenue streams across all three business segments.

• E-commerce: In February, Amazon launched a generative AI shopping assistant (Rufus) for consumers. It also introduced generative AI tools that help sellers create product listings. In addition, in its North American fulfillment centers, Amazon uses generative artificial intelligence and computer vision to discover defects in products before they are delivered to consumers. And it uses machine learning to optimize warehouse inventory and last-mile delivery, making its logistics business more efficient.
• Digital Advertising: Last year, Amazon introduced a generative AI tool that allows marketers to create relevant and engaging lifestyle images with their products, which in theory helps brands run more cost-effective advertising campaigns. In addition, Amazon uses machine learning to ensure that consumers see relevant advertising for sponsored products in the marketplace.
• Cloud computing: AWS designed custom AI chips for training and inference as a cheaper alternative to Nvidia GPUs. The company also added new features to its SageMaker machine learning platform and Bedrock generative AI platform. CEO Andy Jassy recently told analysts, “In the past 18 months, AWS has released more than twice as many machine learning and generative AI features into general availability as all other major cloud providers combined.”

More broadly, AWS accounted for 32% of cloud infrastructure and platform services (CIPS) spending in the June quarter, which puts it nine percentage points ahead of its nearest competitor. Microsoft Azure. The lead in CIPS means AWS should be a major beneficiary as companies spend more aggressively on AI.

In a recent note, Argus’ Jim Kelleher wrote, “As a leading provider of infrastructure-as-a-service and other cloud services, AWS is uniquely positioned in the burgeoning AI-as-a-service market.” Additionally, executives surveyed by Morgan Stanley collectively sees Microsoft Azure and AWS as the public clouds most likely to gain generative AI share over the next three years.

Amazon stock is trading at a reasonable valuation

Retail e-commerce sales are expected to grow 8% annually through 2028, and digital ad spending is expected to grow 10% annually over the same period, according to eMarketer. But retail media is one of the fastest-growing verticals in advertising, so Amazon should go beyond media. Indeed, the company is gaining weight so quickly that it could overtake Meta platforms as the second largest ad tech company by 2030.

In addition, International Data Corp. (IDC) estimates that public cloud spending will grow by 19% annually through 2028. However, AI platform services are expected to be the fastest growing vertical in cloud computing, with cumulative spending at 51% annually during that period. This bodes well for AWS given its leadership in CIPS.

Those forecasts give Amazon a good shot at double-digit sales for the foreseeable future, and earnings should grow a bit faster as the company prioritizes cost control. Wall Street expects Amazon’s adjusted earnings to grow 25% annually through 2025, making its current valuation of 42 times adjusted earnings seem reasonable. That’s why now is a good time for patient investors to buy a small position in Amazon stock.