The artificial intelligence (AI) race is on, and it has a wide reach.
- Software companies (like Palantir Technologies and CrowdStrike) are developing programs that use AI to analyze data, solve complex problems, and provide cybersecurity.
- Hardware companies create high-powered semiconductors critical for data centers. Nvidia is the current titan.
- True "picks-and-shovels" companies like Marvell Technology make Ethernet switches and accelerators.
- Cloud providers, like Alphabet, Microsoft, and Amazon (AMZN +2.33%) benefit from the immense data needs AI creates.
- And even technology consulting experts like Accenture get a piece of the pie, helping other businesses make the most of their AI tools.
Nvidia is the talk of the town as the stock has enjoyed an incredible rise, about 220% over the last year and 440% over three years. As shown below, the market cap eclipsed $2 trillion and overtook Amazon for the first time in more than 20 years.
NVDA Market Cap data by YCharts
But this may not last long; here are two huge reasons why.
Amazon Web Services
Few companies provide the massive cloud services necessary to run AI programs requiring enormous data resources. The "big two" are Amazon Web Services (AWS) and Microsoft Azure, with AWS being the world leader at about a third of the global market. Many investors soured on Amazon stock because of AWS in 2022 and 2023, but it is always darkest before the dawn.
AWS drew criticism in 2023 when its formerly rampant growth plummeted, but I have been arguing that investors should wait until companies update their data usage budgets in 2024 before jumping to conclusions. Companies typically budget their resources before the start of a new year. Heading into 2023, most were battening down the hatches for a recession.
Amazon knew budgets were tight, so it assisted customers by helping them lessen usage or move to less expensive plans. The company knew keeping long-term customers happy was more important than making a couple of extra bucks that year. In 2024, it is a different story.
The recession talk is primarily gone; AI is now center stage, and the same customers are now clamoring to leverage it. AI and larger data budgets fueled AWS and Amazon's earnings beat in the first quarter. AWS sales grew 17% year over year in Q1 to $25 billion, compared to 13% year-over-year growth in the fourth quarter of 2023.
NASDAQ: AMZN
Key Data Points
All the rest
AWS stirs the drink, but the other two segments, North America and international, also had strong quarters with sales of $86 billion (12% growth) and $32 billion (10% growth), respectively. More importantly, consumer spending shows few signs of slowing, unemployment is low, and a recession doesn't seem imminent anymore.
One revenue stream that I particularly like is advertising. As you can see below, advertising has become a cash cow in recent years.
Data source: Amazon. Chart by the author.
This lucrative revenue stream should also benefit from companies loosening their budgets. Amazon's ad business is popular because it targets consumers who are already looking to buy. Using Amazon's product placement, featured brands, and pay-per-click ad-buying functions are great ways to outrun the competition.
Finally, back to AI. Amazon has several irons in the fire. One of these is Amazon Bedrock. Bedrock provides foundation models (FMs) from multiple vendors for customers to customize to their needs. Many companies will want to see what generative AI can do to improve efficiency; this is a terrific way to experiment. Another product is the Inferentia chip. Inferentia is an accelerator that allows users to run complex software at high speeds.
Nvidia and Amazon are both tremendous players; however, Amazon's numerous revenue streams should allow the stock to outperform Nvidia over the next year.
