What do you think is the most trusted institution in the United States? The military? The Supreme Court? Those may have been the answer at some point in the not-too-recent past. Today, however, that title belongs to Amazon (NASDAQ: AMZN). The online retail and technology giant garners more trust than any other single institution in America. That is one strong brand presence.
I’d be willing to bet that an Amazon truck drove down your street at some point today. That upturned arrow is plastered on brown boxes sitting on millions of porches across the country. Amazon is everywhere. Rather than saturating the airwaves with commercials, the company saturates our physical world.
This ubiquity is an important component of its trusted position, but it isn’t enough on its own. Even more essential is that Amazon delivers — pun intended — on its promises. You can order almost anything you can think of from Amazon and it will arrive as advertised in the time you expect. It executes at an extremely high level on a scale that boggles the mind. Last year, Amazon delivered 4 billion packages in the U.S. no later than the next day.
Its business has grown far beyond e-commerce, however, and is continuing to forge new paths. Let’s consider what the next few years could hold.
Amazon is determined to lead the era of AI
It’s no secret that there is an arms race in Silicon Valley. The big players are pouring billions into artificial intelligence (AI) infrastructure and research, hoping to stay ahead of the competition. It’s a field in which falling behind is not an option despite the enormous costs involved. As Alphabet CEO Sundar Pichai put it in the company’s latest earnings call, “the risk of underinvesting is dramatically greater than the risk of overinvesting.”
Amazon is on the same page. Major investments are happening companywide, but nowhere is the impact more acutely felt than in its subsidiary, Amazon Web Services (AWS). The “hyperscaler” — that is, builder and operator of big data centers that power the cloud — was already the leading cloud provider before the current AI race kicked off. It’s been upgrading and expanding its infrastructure to match the demands of AI and rolling out products aimed at bringing users — especially enterprise customers — on board. It’s paying off. AWS grew its Q1 2024 and Q2 2024 sales year over year by 17% and 19%, respectively.
It won’t be an easy road, however, as Amazon faces stiff competition
Despite the sales growth, it isn’t going as smoothly as many would like, including Amazon’s founder, Jeff Bezos. It was reported recently that the former CEO has been reaching out to Amazon leadership, asking why more AI firms aren’t choosing AWS. Its hold on the market appears to be slipping.
Microsoft‘s Azure has been gaining market share, while AWS is losing it. From Q1 2023 to Q1 2024, Azure went from 23% of the market to 25%, while AWS dropped from 32% to 31%. Perhaps to try to stem the tide, the AWS CEO was replaced in May. Fortunately for Amazon, the leadership change looks to be working out. The second quarter of this year saw the trend reverse, with AWS clawing back a percentage point from Azure.
Despite the struggles, Amazon is headed in the right direction
Amazon still has a long way to go and will have to continue to defend its market position, but the future looks bright for AWS. The market as a whole is going to grow rapidly as AI continues to mature. So, if AWS trades a percentage or two of market share, it shouldn’t be a big issue. Furthermore, Microsoft had a bit of a head start, given its partnership with OpenAI, the maker of ChatGPT. I think that edge will diminish as new players emerge and challenge OpenAI’s leadership.
Amazon’s ultimate aim here is to be the bedrock on which AI is built. It sees itself as the enabler of AI, and its priority is not necessarily building the most influential AI products itself — although, to be sure, it’s investing here too, not the least of which was its $4 billion purchase of the OpenAI rival Anthropic — but providing the tools to build and infrastructure to run AI. As CEO Andy Jassy put it in his 2023 letter to shareholders, “These AWS services… will empower internal and external builders to transform virtually every customer experience that we know (and invent altogether new ones as well). We’re optimistic that much of this world-changing AI will be built on top of AWS.”
I think Amazon is in a great position to do just that, and five years’ time is enough for AI to really take off. This is on top of continued success from its core retail business and rapid expansion of its advertising segment. Now, Amazon does command a premium compared to some of its tech peers. Its price-to-earnings ratio (P/E) is fairly high at 43.
However, that is actually a bit lower than where it’s historically traded, so I’m comfortable with this. For these reasons and more, I believe Amazon’s stock will outperform the market over the next five years.
