1. Amazon.com, Inc. (NASDAQ:AMZN)
Number of Hedge Funds Investors: 286
Joshua Ketter from Spreetail recently said while talking to Schwab Network that Amazon.com Inc (NASDAQ:AMZN) smart home devices are still not up to consumer expectations and it will take time for the company to catch up.
“Amazon, to a certain extent, they’re kind of a victim of their own success. They’ve set a very high bar and have very high expectations with consumers, and I personally believe that they’re not going to quite get there with this release. I think over the course of time they’ll get there. They really do have a right to win in this space, though. To your point, I have over 50 devices in my house—Amazon Alexa connects all of those, but it doesn’t do a good job at understanding which ones I actually wanted to turn on or off unless I’ve named it just right. And so that kind of nuance in language is really important, and you see that ChatGPT has made tremendous strides in that area. However, if I look at some of Amazon’s own current AI models, they’re not quite there. They’re about a year behind, and so I do think they’ll get there eventually, but if they’re using their current AI capabilities, I do think it’s going to be limited. And again, I think the challenge is going to be the consumer is going to have the expectations that this is another kind of Tony Stark Jarvis-type thing or a Star Trek Central Computer, and that they’ll be able to do anything, right? And the moment you start asking questions and it fails, I think it can be challenging for Amazon to meet consumers’ expectations.”
Despite weak guidance, Amazon could easily surpass $100 billion in operating income within the next two years because of its AWS growth engine. In the latest quarter, Amazon Web Services sales jumped 19% and operating profit for the segment jumped 62% in 2024 on an annual basis.
The market is currently forecasting $6.27 per share in profits this year (a 13% YoY growth) and $7.59 per share next year (a 21% YoY growth). Amazon’s stock is priced at a profit multiple of 30.2x. This valuation might look rich, but when we incorporate AWS growth, the stock seems to have more upside potential.
Mar Vista Global Quality Strategy stated the following regarding Amazon.com, Inc. (NASDAQ:AMZN) in its Q4 2024 investor letter:
“Amazon.com, Inc.’s (NASDAQ:AMZN) profitability was the key highlight of the third quarter financial results, with AWS and International Retail achieving record operating margins, and North America Retail posting its second-best margin in five years. Even more impressive was the fourth quarter operating income forecast, projecting up to $20 billion, significantly exceeding the expected $16 billion and suggesting a record 11% margin. This exceptional performance was driven by economies of scale, logistics efficiencies, successful AI implementations, increasing ad revenue, and accelerated AWS growth.
We keep our investment in Amazon due to several factors: AWS growth has further potential, Amazon Prime Video monetization is in its initial stages, and the company is expanding into promising sectors like Pharmacy and Logistics. Furthermore, with strengthening profitability and cash reserves exceeding $100 billion, the possibility of substantial capital returns increases. By continuing to innovate and invest in technologies like AI and cloud computing, Amazon is well-positioned to keep its competitive edge.”
While we acknowledge the potential of Amazon.com Inc (NASDAQ:AMZN), our conviction lies in the belief that under the radar AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an 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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