3 Reasons Why Amazon Is One of the Top Artificial Intelligence Stocks to Consider

Would you be surprised to learn that 60% of Amazon's (AMZN) total operating income over the past year came solely from Amazon Web Services (AWS)? This is indeed the case! While many still view Amazon primarily as an online retailer, AWS has proven to be its most significant profit generator. This fact is particularly noteworthy in light of the increasing importance of artificial intelligence (AI).

To illustrate why Amazon stands out as one of the best AI stocks to invest in today, we will present three compelling points.

1. Robust Data Centers

AI technology enhances efficiency and has the potential to significantly boost productivity in the long run. However, it also presents unique challenges, particularly in handling and processing vast amounts of required data. This is where Amazon excels. The company is recognized as the world's leading provider of cloud data services and is determined to maintain that position.

Amazon has ambitious plans to invest approximately $100 billion in over 200 data centers globally over the next decade. This investment ensures that AWS will have the necessary capacity to retain its status as a global leader.

AWS operates similarly to a utility; customers are billed based on their data usage. This flexible business model is invaluable in an increasingly data-driven world. In the third quarter of 2024, the segment experienced a growth of 19%, generating $27.5 billion. Over the past 12 months, AWS sales exceeded $100 billion, with an operating income of $36 billion. With the rising demand for AI and expanded capacity, AWS is set to fuel Amazon's profits in the future.

2. Strong Cash Flow

Amazon largely benefited during the stimulus-driven years of 2020 and 2021, as consumers ramped up spending, and interest rates were kept low. As a result, Amazon's operating cash flow reached unprecedented levels. Operating cash flow refers to the amount of cash generated by a company’s core business, making it a crucial metric for assessing success.

In Amazon's case, cash flow comes from product sales, advertising, third-party seller services, and AWS. Although the stimulus years marked a peak, Amazon's current operating cash flow has surged significantly higher:

Amazon generated $113 billion in cash flow over the past 12 months, which is an all-time high, surpassing the boom from 2020-2021. This impressive figure is largely attributable to soaring sales in AWS. Given the demand driven by AI, cash flow is expected to continue rising, enabling Amazon to invest generously in growth while maintaining its competitive edge in cloud services.

3. Attractive Valuation

In 2024, the S&P 500 index experienced over 50 new all-time highs, leading to elevated valuations for many companies. However, Amazon's stock price remains reasonable in comparison. Based on the aforementioned cash flow and earnings, Amazon trades below its five-year historical averages.

Amazon's price-to-earnings ratio is projected at just 37 based on next year's estimates. While this figure may still seem high, it is relatively low historically for the company. Despite the overall market's rapid ascent, Amazon continues to represent a strong value for long-term investors.

With numerous quality AI stocks available, it is advisable to hold several in your portfolio. Given the soaring demand for data, Amazon's exceptional cash-flow generation, and its reasonable valuation, Amazon stock is a wise choice for long-term investment.

Amazon, AI, Investing