Amazon: Buy, Sell, or Hold?
Amazon (NASDAQ: AMZN) isn't every investor's cup of tea. The e-commerce and cloud computing giant's stock trades at lofty valuation ratios, its revenue growth has slowed down in recent years, and it's not easy to add impressive percentage-rate growth to an already massive business. With a market cap of $1.94 trillion and $591 billion in trailing revenues, Amazon ticks all of these uninspiring boxes.
However, I think you'll regret it later if you're not buying Amazon stock yet. If Amazon built its history around online shopping services, its future will lean on artificial intelligence (AI).
Amazon's AI-focused business plan
Artificial intelligence is reshaping Amazon's business model in profound ways. By implementing AI tools and services across its vast infrastructure, Amazon is not only enhancing operational efficiencies, but also creating new business opportunities.
For example, Amazon Go stores utilize AI for seamless, cashier-less shopping experiences, using smart shopping carts to track your grocery-shopping spree in real time. With the Amazon Web Services (AWS) cloud computing platform, AI services are attracting a growing number of enterprise clients looking for robust and scalable solutions. And those massive warehouses and shipping centers are automated to the hilt, based on advanced inventory tracking and lots of robotic product-picking devices.
Furthermore, AI is enabling Amazon to venture into new areas such as healthcare, with initiatives like Amazon Care and AI-driven diagnostic tools. A significant recent move is Amazon's $4 billion investment in the AI research company Anthropic -- similar to Microsoft (NASDAQ: MSFT) investing $13 billion in ChatGPT maker OpenAI.
Long story short, Amazon makes practical use of AI systems in many ways. Without them, the company would grind to a halt and fade away. But with its innovative AI muscle, Amazon sets the gold standard for effective operations across several sectors and many industries.
This multifaceted approach ensures that Amazon remains at the forefront of innovation, continuously transforming its business model to unlock new growth potentials. And from the fundamental e-commerce business to its next-generation AI services backbone, it's all powered by many types of artificial intelligence.
What if Amazon wanted to spin off AWS?
Let's imagine what could happen if Amazon decided to spin off the AWS division as a stand-alone company. What would this high-tech behemoth be worth?
A revenue-based valuation should be a good start. AWS generated $90.8 billion of segment-level sales in 2023. Given Amazon's price-to-sales (P/S) ratio of 3.3, you could give it a $300 billion market cap with a straight face.
Then again, that ratio also accounts for the less-profitable and slower-growing e-commerce business. Companies with a tighter focus on the AI market come with P/S ratios ranging from 7 to 37. Splitting the difference, you get a P/S ratio of at least 20 and a presumptive market value of $1.8 trillion or more. Dial the ratio back to 11, matching Microsoft, and it's still a cool trillion-dollar business. Again, that's just the AWS division without support from Amazon's e-commerce business.
That's a pretty conservative calculation, too. Nvidia (NASDAQ: NVDA) shares trade at 81 times the last fiscal year's operating income. If you apply the same logic to Amazon's AWS, you get a $2 trillion market cap. That hypothetical cap is about equal to Amazon's entire market footprint today.
In other words, if the stock market is giving Amazon full credit for its booming AI business, I could argue that it isn't admitting any value at all for the market-defining online shopping platform and its gigantic shipping infrastructure.
An unmatched value proposition
So AWS is already a trillion-dollar operation in many ways, or at least it would be if Amazon wanted to spin it off. Don't forget that these are early days in the long-term AI story.
At the same time, the e-commerce business looks dramatically undervalued. When you're buying Amazon stock today, you're tapping into a high-octane growth story named AWS and a deeply discounted value investment in the e-commerce sector. It's the best of both worlds.
Amazon should already be a part of any diversified investor's portfolio, but it's not too late to get started. It's the world's largest start-up, always hungry for more of that delicious global growth.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Anders Bylund has positions in Amazon and Nvidia. The Motley Fool has positions in and recommends Amazon, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
Amazon: Buy, Sell, or Hold? was originally published by The Motley Fool
