Investors should maintain patience with this resilient compounding stock.
Every quarter, a different stock appears to lag behind the top performers in artificial intelligence (AI), primarily Microsoft, Nvidia, and Palantir Technologies. This summer, it’s Amazon (AMZN -0.23%) that has started to fall behind the competition.
The cloud computing, e-commerce, and logistics giant has experienced a 10% drop in stock value from its recent peaks due to slower growth rates in its cloud sector compared to rivals. For long-term investors, it’s essential to take a step back and evaluate the broader market landscape while Wall Street zeroes in on individual performance.
Here’s why Amazon’s stock is poised for significant growth throughout the decade and may surpass Nvidia and Palantir combined by 2030.
Cloud Computing Challenges?
In Q2, Amazon’s cloud service, Amazon Web Services (AWS), saw a revenue increase of 17.5%, totaling $30.9 billion, which translates to an annualized rate of $123.6 billion. Despite this growth, it lags behind competitors like Microsoft Azure, which reported a remarkable 34% increase, partly due to its substantial partnership with OpenAI, which is heavily investing in cloud services.
This disparity in growth has raised alarms among investors about AWS potentially losing ground to Microsoft. While it would be favorable for Amazon to secure a relationship with OpenAI, it isn’t left behind in AI developments either.
AWS maintains a strong relationship with Anthropic, the second-largest AI start-up, valued at approximately $200 billion. Anthropic’s revenue is skyrocketing, reaching $5 billion in annualized sales just last month. With a commitment to spend billions on AWS, this partnership will enhance revenue growth for Amazon’s cloud division. AWS remains the leader in cloud computing and is set to benefit from increasing AI investments in the coming years, potentially driving revenue and earnings significantly higher. Operating income for AWS was $43 billion over the past 12 months and could approach $100 billion by 2030.
Room for Margin Expansion
Many investors may overlook Amazon’s core business of e-commerce and its Prime subscription model. North American e-commerce sales are still growing robustly, with an 11% rise last quarter to $100 billion and a total of $404 billion over the previous year. International sales, including regions like Western Europe, Japan, and India, have reached $150 billion in trailing-12-month figures.
Advertising services, up by 22%, are further driving margin growth in Amazon’s retail business. Over the last year, North American retail saw an operating margin of 7%, while the international division achieved a 3.4% margin. As Amazon continues to invest in ambitious projects, including Alexa and Project Kuiper, as well as enhancing delivery services in rural America, these investments will likely result in greater operating leverage, which can further improve profit margins over time.
Why Amazon May Outperform Nvidia and Palantir
Returning to Nvidia and Palantir, which collectively hold a market cap of $5 trillion, I see three key reasons why Amazon may outpace these AI leaders and become the largest company globally by 2030.
Firstly, Amazon benefits from two powerful growth engines: cloud computing and e-commerce, which significantly broadens its potential market. Even as revenue exceeds $670 billion, there remains ample opportunity for future sales growth. This margin expansion will enhance overall profits.
Secondly, Amazon is actively reducing its dependence on Nvidia by utilizing its proprietary Trainium chip, effectively taking some market share away from Nvidia.
Lastly, Amazon’s valuation currently appears more attractive than that of Nvidia or Palantir. With a forward price-to-earnings ratio (P/E) of 33, it is lower than Nvidia’s 41 and significantly below Palantir’s sky-high 278, which may restrict Palantir’s future growth. Taken together, these factors lead me to believe that Amazon has the potential for a much greater market cap by 2030 while Nvidia and Palantir may struggle to keep pace, positioning Amazon as a favorable investment at current levels.
Brett Schafer holds positions in Amazon. The Motley Fool has stakes in and recommends Amazon, Microsoft, Nvidia, and Palantir Technologies, as well as advocating certain options involving Microsoft. The Motley Fool has a disclosure policy.
