Why Amazon stock is a no-brainer investment in artificial intelligence (AI).

Amazon (AMZN 1.19%) may not be the first stock that comes to mind when the words artificial intelligence (AI) are mentioned. However, Amazon is more exposed to this technology wave than most people realize.

Additionally, Amazon excels in its AI activities, and I think that makes the stock an unusual buy right now.

AWS benefits from two technology trends

Amazon and AI are no strangers. Artificial intelligence has already been incorporated into Amazon’s commerce business through its online platform, advertising products and logistics network. However, the latest wave of generative AI is boosting its cloud computing business, Amazon Web Services (AWS).

Cloud computing providers benefit massively from this generative AI trend for a few reasons.

First, companies need massive computing power and data storage when trying to build their own AI model. Buying a server dedicated solely to AI modeling is out of the budget for many companies looking to get involved in this space, so renting it from a cloud computing provider like AWS is a cost-effective way to get access to state-of-the-art hardware.

Second, business workloads are migrating from on-premises to the cloud. This is a slow transition and can be very tiring. However, with the help of Amazon Q (its AI assistant), this migration is easy.

Cloud computing is expected to grow over the next five years, with Mordor Intelligence projecting the total market to grow from $680 billion in 2024 to $1.44 billion by 2029. AWS holding the largest market share of cloud computing, will benefit from this transition. .

Artificial intelligence is taking AWS to new heights, but how does that help Amazon’s finances?

AWS is partly to blame for Amazon’s premium valuation

Although Amazon’s commerce divisions account for more than 80% of total sales, AWS accounts for 64% of operating profits. This means that the outsized growth of its AWS division will have an even greater effect on Amazon’s profits.

In Q2, AWS revenue grew 19% year-over-year, generating an operating profit margin of 36%. It’s an impressive deal. If it were a stand-alone business, it would garner a premium valuation. However, Amazon already has a pretty premium price.

AMZN PE report data (before) by YCharts

At 40.2 times forward earnings, Amazon is by no means a cheap stock. This is likely the result of investors being excited about cloud computing and the effect AI will have on it. It’s also an acknowledgment that Amazon’s commerce business could become much more profitable as it focuses on becoming more efficient.

In the long term, AWS will contribute massively to the bottom line and get a huge boost from all the new cloud workloads brought online. This will boost the stock and I think makes the stock price worth paying.

Amazon isn’t the first choice for many AI investors, but I think there are pretty compelling reasons to buy the stock now to take advantage of the AI ​​wave.