Key Points
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Amazon got hit with a big sell-off following its latest quarterly report, and the stock has significantly underperformed the S&P 500 in recent years.
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Amazon’s massive infrastructure investments could help it be a huge AI winner over the next decade.
Amazon (NASDAQ: AMZN) stock saw a big valuation contraction following the publication of the company’s fourth-quarter results. Sales for the period actually came in ahead of expectations, but earnings missed the market’s forecast. The business posted non-GAAP (adjusted) earnings of $1.95 per share on sales of $213.4 billion, while the average analyst estimate had modeled for per-share earnings of $1.97 on sales of $211.3 billion.
Despite better-than-anticipated sales performance last quarter, investors bristled at higher-than-anticipated costs and the tech giant’s guidance for massive capital expenditures (capex) this year. In order to continue building out its AI infrastructure and pursue other growth bets, Amazon anticipates spending roughly $200 billion this year.
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While the company’s massive capital expenditure outlays will put a substantial damper on the company’s near-term earnings, there are good reasons to continue liking Amazon as an artificial intelligence (AI) stock for the long term.
The letters AI on an illustration of a computer chip.
Image source: Getty Images.
Leadership in the cloud and e-commerce point to big AI opportunities
Amazon Web Services (AWS) continues to lead the cloud infrastructure market, and last quarter’s sales growth of roughly 24% for the segment topped Wall Street’s expectations. AWS should continue to enjoy sales tailwinds as more AI applications are developed, launched, and scaled across the platform, and the segment’s fantastic operating margin (35% last quarter) should ensure that the business continues to be a profit-generating machine.
On the e-commerce side of things, Amazon remains in very early innings when it comes to leveraging the benefits of AI and automation, and massive investments in AI and robotics should help the unit significantly expand margins over the long term. With its huge sales base, even moderate margin improvements for the online-retail business could wind up making a huge difference for the bottom line.
While the S&P 500‘s level has risen roughly 77% over the last five years, Amazon stock is up just 32% across the stretch. Pressures connected to pandemic-related issues, inflation, and rising costs have dampened the stock’s performance, but there are good reasons to believe that its long-term AI opportunities are currently being discounted by the market.
As the company’s huge capex forecast for this year makes clear, Amazon is not resting on its laurels. Big investment pushes are going to depress earnings this year, and it’s reasonable to expect that the company will have another huge round of capital expenditures next year as well.
While intense competition and spending among tech giants in order to avoid getting left behind in the AI race comes with substantial risks, Amazon is betting on categories with the potential to deliver huge payoffs over the long haul. Crucially, the company already has strong positioning in these categories and the setups to facilitate strong returns on its large investments. The company’s existing foundations and strengths in cloud infrastructure, e-commerce, and adjacent spaces position the business to be a big winner over the next decade and beyond.
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Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.