1) Amazon.com, Inc. (NASDAQ:AMZN)
Number of Hedge Fund Holders: 286
Amazon.com, Inc. (NASDAQ:AMZN) possesses a wide economic moat, courtesy of its network effects, cost advantages, intangible assets, and switching costs, says Morningstar. The company continues to disrupt the traditional retail industry, while, at the same time, emerging as the leading infrastructure-as-a-service provider through Amazon Web Services (AWS). The firm also added that Amazon.com, Inc. (NASDAQ:AMZN) has been widening its lead, which is expected to result in economic returns well above the cost of capital. The secular pivot towards e-commerce remains unabated, with the company increasing its market share.
Amazon Prime binds Amazon.com, Inc. (NASDAQ:AMZN)’s e-commerce efforts together, resulting in providing a steady stream of high-margin recurring revenue. In return, consumers enjoy one-day shipping, exclusive video content, and other services, says Morningstar. Therefore, the company builds a healthy circle in which customers and sellers tend to attract each other. Notably, high-margin advertising and AWS continue to grow faster than the corporate average, which is expected to fuel profitability over the years. Through AWS, Amazon.com, Inc. (NASDAQ:AMZN) is one of the leading companies in public cloud services.
The full-stack AI/Cloud offering is well-placed to benefit from a multi-year shift in AI and IT workloads. Tsai Capital, an investment management company, released a Q4 investor letter. Here is what the fund said:
“Amazon.com, Inc. (NASDAQ:AMZN) (AMZN—Year of First Purchase: 2017) Amazon was founded by Jeff Bezos in his garage in 1994 and today dominates the markets it serves. The company’s e-commerce business is gaining market share, despite its immense size, while its cloud services division, Amazon Web Services (AWS), is by far the leading cloud provider. We estimate that AWS now generates 60-65% of the company’s total operating profits.
Both Amazon retail and AWS benefit from numerous competitive advantages and deliver a high customer value proposition. Rather than leveraging its size to maximize short-term profits, the company follows a scale-economies-shared business model, sharing a generous portion of its margin with the consumer. This creates a flywheel effect that reinforces the company’s ecosystem.
Amazon’s approach of investing heavily in the business today to create shareholder value later masks the company’s underlying earnings power. As consumers continue to shift their spending from in-store purchases to online shopping, and as data continues to migrate from on-premise servers to the cloud, we expect Amazon to grow revenues at a low double-digit rate for at least the next five years and to significantly increase its operating margins.”
While we acknowledge the potential of AMZN as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued AI stock that is more promising than AMZN but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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