Source: PaxForex Premium Analytics Portal, Fundamental Insight
As the race for dominance in artificial intelligence (AI) accelerates, major tech giants with substantial financial resources are increasingly pouring substantial capital into various AI startups in hopes of capitalizing on the next major breakthrough. Amazon exemplified this strategy when it invested a staggering $4 billion in Anthropic, the company responsible for AI assistant Claude.
This deal, unveiled in late September, establishes Amazon Web Services (AWS) as Anthropic's principal cloud services provider. If Anthropic rises to prominence within its industry, this partnership is expected to bolster AWS sales significantly. But does this substantial investment make Amazon an attractive buy at this point?
Anthropic specializes in generative AI, a technology applicable in customer service, AI assistant development, and coding assistance, among other applications. Essentially, Anthropic equips its clients with a toolkit for crafting AI models tailored to their specific requirements. Anthropic introduced its AI assistant, Claude, in March.
With Amazon's investment in Anthropic, any users of Anthropic's services will also rely on AWS for their computing needs, as Anthropic's data and models will reside on the AWS platform. This integration will make AWS an appealing choice for Anthropic's clients, facilitating seamless collaboration between the two companies.
This investment could provide the much-needed boost for AWS, which has faced challenges lately. In the second quarter, AWS experienced a modest 12% year-over-year growth rate, significantly slower than its primary competitors, Google Cloud (Alphabet) and Azure (Microsoft). Furthermore, its profitability declined, with operating income dropping by 6%, leading to a reduction in its operating margin from 29% to 24%. Nonetheless, AWS remains the largest global cloud services provider, commanding an estimated 32% market share.
Considering that the cloud computing market is anticipated to surge from $678 billion in 2023 to a staggering $2.4 trillion by 2030, leadership in this sector is crucial.
While Amazon's investment in Anthropic may not be a transformative game-changer, it does strengthen Amazon's position in AI, where it lags behind its primary competitors. This $4 billion investment grants Amazon a minority ownership stake in Anthropic and is poised to enhance AWS's competitiveness in the evolving cloud computing landscape.
While AWS remains top reason for considering an investment in Amazon, it's essential to note that it constituted only 17% of Amazon's revenue in the second quarter. However, it played a pivotal role, accounting for a significant 70% of the company's operating income. This highlights the critical role AWS plays in Amazon's profitability. In essence, Amazon is transitioning from a consumer goods-oriented company to one deeply entrenched in the tech sector, as evidenced by its notable improvement in gross margins over the past decade.
As Amazon's gross margins continue to strengthen, its potential for achieving higher profit margins also grows, even though recent performance hasn't reflected this. CEO Andy Jassy has been unwavering in his commitment to enhancing Amazon's operational efficiency. While there is still work to be done, the progress made under his leadership has been commendable.
However, as Amazon strives to reclaim the remarkable profitability figures it attained in 2021, the market remains skeptical about its prospects. Amazon's price-to-sales ratio is lingering around levels last seen in 2016 when its gross margin was far less impressive.
All in all, this presents an exceptional buying opportunity, as the stock should be valued much higher given its remarkable gross margin improvements. If Amazon can restore its high profit margins and invigorate its AWS business, the stock has the potential to deliver substantial gains, as the market isn't currently pricing it for perfection.
This situation presents an attractive entry point for long-term investors, especially considering Amazon's strategic positioning to harness the benefits of advancements in artificial intelligence.
As long as the price is above 123.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 129.65
- Take Profit 1: 133.00
- Take Profit 2: 140.00
Alternative scenario:
If the 123.00 level is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 123.00
- Take Profit 1: 118.00
- Take Profit 2: 113.00
