Attention has been centered on Nvidia (NVDA 0.70%) stock when it comes to the booming market in artificial intelligence (AI). The computer chip maker is now generating more than $100 billion in annual revenue and is valued as one of the largest companies in the world by market capitalization.
I believe this intense focus on Nvidia means you should avoid the stock. There are so many minds trying to figure out what it will earn in 2025 that the stock is likely priced highly efficiently.
The same can't be said of other AI stocks out there, of which there are plenty. One that springs to mind is Amazon (AMZN 0.94%), a technology giant and one of the largest Nvidia customers. Here's why Amazon is the best AI stock to buy for your portfolio right now.
AI across the e-commerce supply chain
What makes AI so exciting for Amazon is how many different business lines can implement these new technologies. There are plenty of examples just in its e-commerce and retail division.
In fulfillment centers, Amazon is now deploying hundreds of thousands of robots to help increase efficiencies. These robots will become much more efficient when updated with new generative AI "brains" that will help them operate seamlessly with each other. It has already deployed one futuristic warehouse in Shreveport, Louisiana, which has 10 times as many robots as existing Amazon warehouses.
Or, take Amazon's advertising division, which now generates $56 billion in annual revenue. Brands can now use Amazon's AI image generator to help build better sponsored listings and advertisements across Amazon's various platforms. Advertising is highly profitable for Amazon, meaning the company should get a fantastic return on investment if AI helps grow revenue for this segment.
Lastly, there are AI enhancements for consumers on the Amazon e-commerce marketplace. Customers can now interact with an AI assistant called Rufus to help find what they need in the endless Amazon catalog or get review summaries for products. This should lead to a better customer experience, resulting in more spending on the e-commerce marketplace.
NASDAQ: AMZN
Key Data Points
Boosting the cloud computing market
AI is going to directly help Amazon's cloud computing division called Amazon Web Services (AWS). Most of these new AI software tools require a ton of computing power for training and implementation, with companies such as Anthropic turning to AWS for these needs. AWS revenue accelerated to 19% year-over-year growth in the last three quarters and generated $107 billion in revenue last year. Management says it is still way behind in matching compute supply with all the demand from these AI start-ups such as Anthropic.
Profit margins at AWS continue to amaze. The division had a 37% operating margin in 2024, generating more than half of Amazon's annual operating income in the calendar year. Margins may fall slightly as the cloud computing sector eventually matches supply with demand -- which typically leads to lower profit margins -- but AWS has posted sky-high profit margins for Amazon for many years. I expect this to continue in the future.
AMZN PE Ratio (Forward) data by YCharts
Why Amazon stock is a buy today
Looking at the forward price-to-earnings (P/E) ratios of Amazon and Nvidia, the latter stock has an edge. Nvidia's forward P/E is 26.6 compared to Amazon's 32.4.
Taking these numbers at face value, you might think Nvidia stock is a better buy for investors in 2025. However, smart investors know they need to take a longer view than one year when performing stock analysis.
Nvidia has historically gone through many down cycles with its business, which lead to falling revenue and declining profit margins. While I don't know whether this will happen in 2025, it will happen eventually once the AI demand boom slows down. This will lead to a decline in its earnings, which are at an extended level due to its record-high operating margin in 2024.
Amazon's operating margin is more likely to move higher than lower over the long term, which will help earnings grow at an aggressive pace. Consolidated operating margin was 10.75% in 2024.
As AWS becomes a larger part of the business and AI efficiencies help in advertising and e-commerce, I think this figure can get close to 20% over the next few years. Assuming Amazon's $638 billion in annual revenue can expand to $800 billion in a few years, that is $160 billion in annual earnings for Amazon compared to $68.6 billion in 2024.
Taking a longer view, Amazon's P/E ratio can come down much faster than Nvidia's with its potential for margin expansion compared to Nvidia's risk of margin compression. This operating leverage potential makes Amazon the best AI stock to buy for your portfolio today.
