Following a brutal market sell-off in 2022, excitement surrounding artificial intelligence (AI) helped fuel the Nasdaq Composite's 43% rise last year. The "Magnificent Seven" stocks -- Amazon (AMZN 3.43%), Apple, Alphabet, Microsoft, Meta, Nvidia, and Tesla -- contributed to much of the market gains.
Microsoft and Alphabet kicked off the AI revolution following splashy investments in start-ups including ChatGPT developer OpenAI and Anthropic.
Amazon did not appear to be moving at the same pace as its big-tech counterparts when it came to AI. However, over the past year, the company has quietly made inroads in the space, and investors are beginning to understand the company's potential as an AI leader.
Let's dig into what moves Amazon is making and how AI could open up its next frontier of growth.
The tea leaves are encouraging
Over the last half-century, the Nasdaq has produced negative annual returns 14 times. But interestingly, there are only two periods where there was more than one year in a row with a decline: 1973-1974, and 2000-2002.
Since 2001, the Nasdaq has experienced annual declines of 30% or more three times: in 2002, 2008, and 2022. However, after market crashes in 2002 and 2008, the index soared for consecutive years thereafter. The index returned an average of 16% per year from 2003 to 2007 -- ranging from a 1.4% increase to a 50% one. And in 2009 and 2010, it increased by an average of 30% -- 44% one year and 17% the next.
If history repeats itself, the Nasdaq will gain this year. Will history repeat itself? No one knows.
But even if no one knows what will happen, the general idea is that the capital markets are resilient and tend to bounce back relatively quickly. And while Amazon has been impacted on the e-commerce side of the business as consumers have felt less confidence and on the cloud computing side as businesses have reined in spending, it has made a number of strategic moves that should encourage investors, particularly as optimism for a strong 2024 for the Nasdaq builds.
Image source: Getty Images.
Amazon's AI empire
Amazon captured the headlines following its investment in Alphabet-backed Anthropic in late 2023. While this might have given the impression that Amazon was playing catch-up to Microsoft and Alphabet, the deal contained many important features.
For starters, Anthropic will now use Amazon Web Services (AWS) as its primary cloud provider. Anthropic will also use Amazon's own chips to train future generative AI models. This partnership is important for a couple of reasons.
First, growth in revenue for AWS has been decelerating for many quarters. The addition of Anthropic to the AWS ecosystem should help bring some new life to the cloud computing leader as it opens the door for myriad new AI-powered applications.
Using Amazon's Trainium and Inferentia chips could be a subtle opportunity as the AI semiconductor market is dominated by Nvidia and Advanced Micro Devices at the moment.
The chart below illustrates the price-to-sales (P/S) multiple of Amazon benchmarked against its Magnificent Seven cohorts. The metric shows how much investors are paying compared to a company's top line.
Amazon stock looks magnificent
AMZN PS ratio data by YCharts.
The company's P/S of 3.1 is not only the lowest among its big-tech competitors, but it's also flat compared to its 10-year average.
I think it's both intriguing and perplexing that Amazon's P/S has been flat considering how much the company has evolved over the last decade. To me, investors are underappreciating the company's partnership with Anthropic, and likely view competition from Microsoft and Alphabet as too much to fend off. But I think that's wrong.
AWS is going through a new phase of its evolution, and AI is at the nucleus. As generative AI becomes more of a focal point for IT budgets, I think it'll be sooner rather than later that enterprise software spending will shift from primarily on-premises applications to more cloud-based protocols.
Amazon's development of its own chips as well as its deal with Anthropic are important steps to take advantage of this trend. While investors might not be witnessing rocket-ship type growth just yet, the company's position in AI shouldn't be discounted. The long-term prospects look encouraging, and now is a tempting opportunity to use dollar-cost averaging to start scooping up some shares.
