We've entered the era of artificial intelligence (AI). AI is already disrupting massive markets while sowing the seeds that will grow into entirely new industries.
Fortunes will be made by investors who can identify the businesses set to lead this AI-driven revolution. For my money, the company best positioned to do so is Amazon (AMZN -0.18%).
Here's why.
AI will be a boon for the cloud computing industry
Much has been made of Microsoft's partnership with ChatGPT creator OpenAI. It's understandable, as ChatGPT is one of the hottest AI applications on the market. Microsoft has worked to quickly integrate OpenAI's cutting-edge technology into many of its products and services. The tech titan plans to use AI to take on its biggest rivals, including Alphabet's Google in the search industry and Amazon in the cloud computing market.
But let's not forget that Amazon Web Services (AWS) is the No. 1 cloud platform in the world -- and for good reason.
AWS offers a broader selection of cloud services than Microsoft's Azure and Google Cloud. It also offers a wider variety of AI models. While Microsoft is tied to OpenAI, Amazon's new Bedrock generative AI service offers access to models from a host of AI upstarts -- including Stability AI, Anthropic, and AI21 -- as well as AWS' own Titan suite of models.
Microsoft's deal with OpenAI may have provided it with a temporary boost, but Amazon is not going to simply cede this potentially massive market. The cloud juggernaut will bring the full weight of its renowned research and development program to bear on closing the technological gap with Microsoft -- if one even exists. Investors can expect to hear more about Amazon's AI advancements in the coming months. And each new technological achievement is likely to result in a higher stock price for Amazon.
Moreover, while Microsoft has gained cloud business from Amazon's retail competitors, OpenAI's rivals will seek alternatives to Azure, with AWS likely to benefit. This could provide Amazon with a powerful growth catalyst, considering how many AI start-ups are expected to launch in the coming decade.
Automation should boost Amazon's e-commerce profit margin
Amazon also stands to benefit from AI-driven advances in robotics. Automation can drastically reduce labor costs in the online retail giant's sprawling fulfillment network.
Robots don't demand raises or threaten to go on strike. Unlike human employees, their costs tend to decline over time as technological advances drive efficiency gains. Cathy Wood's Ark Investment Management recently noted that advances in machine learning and computer vision have contributed to a stunning 33-fold increase in robot performance over the past seven years, as measured by the number of items picked and placed per hour. For these and other reasons, Ark notes that Amazon could start to add more robots to its fulfillment centers than people within the next few years.
Amazon's automation initiatives fit well with CEO Andy Jassy's plan to make the e-commerce colossus more efficient and, in turn, profitable. AI-powered robots are likely to be an increasingly important part of the company's expansion strategy.
Amazon's stock is still attractively priced
Investors are beginning to take note of Amazon's intriguing AI-fueled growth prospects. Its share price is up nearly 50% so far in 2023.
Yet despite these impressive gains, Amazon's stock is still trading near decade lows based on cash flow from operations (CFFO), a key metric of business performance, cash generation, and liquidity.
AMZN Price to CFO Per Share (TTM) data by YCharts
At less than 24 times operating cash flow, Amazon's shares are significantly cheaper than those of other AI leaders. Microsoft and Nvidia, for example, recently traded for 30 and a whopping 142 times operating cash flow, respectively. Amazon's current stock price is a relative bargain, with similarly attractive -- and perhaps even superior -- long-term growth potential than its AI rivals.
