How Amazon’s AI Chips, Auto Push Impact The Stock

Amazon stock (NASDAQ: AMZN) has fared well this year, rising by close to 50% so far. This is well ahead of fellow big tech titans Apple and Alphabet which remain up by about 34% each.  Amazon has clearly gotten a lot of things right. Amazon’s massive recommence infrastructure investments made over the last several years are showing clear signs of paying off, as operating profits surge. The company has also executed well on its advertising business. Amazon is also seen as a big winner in the generative AI space, driven by its cloud business. So what are some of the recent developments for Amazon stock?

Amazon is doubling down on designing its proprietary AI chips. Last week, the company unveiled Trainium3, its most powerful in-house AI chip, which it says is 2x as fast as its predecessor, Trainium2, while delivering roughly 40% better energy efficiency. The chips are expected to be available in 2025 and will reportedly be fabricated using TSMC’s latest 3nm technology. Separately, if you want upside with a smoother ride than an individual stock, consider the High Quality portfolio, which has outperformed the S&P, and clocked >91% returns since inception.

Amazon is marketing its AI products to other companies. For instance, Apple says that uses Amazon’s AI chips for certain tasks such as search.  The consumer tech giant has also indicated that it was evaluating if the latest Amazon chip can be used to train AI models included in Apple Intelligence. Separately, Amazon announced plans for a massive AI supercomputer built using hundreds of thousands of Trainium2 chips. While Amazon is expected to remain a significant customer of Nvidia’s cutting-edge GPUs, its in-house chip development could eventually help it lower costs for its AWS business and potentially build new revenue streams. See why it may be time to sell Nvidia stock and buy Intel

Amazon is expanding into the automotive space with its new venture Amazon Autos, which will enable customers to purchase vehicles in 48 U.S. cities. The platform will initially focus on selling new cars, with South Korea’s Hyundai starting off as its launch partner. Amazon has indicated that it intends to gradually expand by adding more brands, as well as cities in the coming years. Amazon will act as a go-between, connecting customers to local dealerships that will remain the final sellers of the vehicles. Although Amazon has little experience in the auto industry, its vast and highly engaged customer base as well as the widespread dissatisfaction with traditional car dealership experiences should give it a meaningful opportunity.

Now looking over a slightly longer period, the returns for Amazon stock have been more volatile than the S&P 500 at 2% in 2021, -50% in 2022, and 81% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.

 Amazon stock is increasingly seen as a reasonable value. While the company has historically traded at negative or triple-digit price-to-earnings ratios, its valuation metrics are improving. The company’s stock currently trades at about 35x 2025 consensus earnings. Although revenue growth may slow, Amazon’s margins are clearly on an upward trajectory. Amazon has implemented effective cost management strategies, adopting a more measured hiring pace and enhancing operational efficiency. Over the last quarter, Amazon’s cloud division, reported an operating income of $10.4 billion, a remarkable 50% increase year-over-year, significantly outpacing revenue growth of 19%.  Amazon has also been tweaking its capex strategy, reducing spending on lower-return e-commerce infrastructure, while doubling down on technology infrastructure to meet rising artificial intelligence (AI) demand.  At its current market price of  $225, the stock is trading roughly in line with the Trefis price estimate of $230 per share – the Trefis estimate for Amazon’s valuation.

[1] Returns as of 12/11/2024
[2] Cumulative total returns since the end of 2016

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