Market Concerns and AI Opportunities

This past week has been quite tense for the stock market. The Federal Reserve wrapped up its first meeting under Chairman Kevin Warsh, choosing to keep interest rates steady but signaling that rate hikes could be on the agenda again this year. This news sent both the Nasdaq and S&P 500 down, although there was a bit of a bounce back afterward. Furthermore, it seems that AI and semiconductor stocks might take a hit early next month.

So, is this unpredictable situation creating some chances for investors? I’d say that’s likely in certain sectors. Times like these often open up possibilities to snag stocks that have dropped in value.

Thinking about it, what AI-related stocks might be wise to buy now for a long-term hold, say a decade?

One company that consistently stands out to me is Amazon.

Right now, Amazon’s stock is hovering around $244, which is roughly 12% off its peak of $278.56 that it reached in early May. Interestingly, even amid this market volatility, Amazon saw significant growth in its most crucial long-term segment during its latest quarter.

Amazon’s AI-Driven Growth

Many still consider Amazon primarily as an online retailer. However, the real reason to keep an eye on Amazon for the long haul is its cloud sector, Amazon Web Services (AWS), which is really picking up speed. In its first quarter, AWS revenue jumped 28% year-over-year to $37.6 billion—the fastest growth it’s seen in over three years. This is up from 24% in the previous quarter. Overall, AWS’s annual revenue now stands at $150 billion.

Amazon’s CEO, Andy Jassy, noted, “It’s unusual for a business of this size to grow so rapidly; last time we saw such growth, AWS was about half its current scale.”

Artificial intelligence is a key driver behind this acceleration. AWS’s AI revenue has exploded from almost nothing three years ago to over $15 billion annually, with a staggering order backlog of $364 billion that includes a recent commitment of over $100 billion to Anthropic.

AWS isn’t just Amazon’s fastest-growing business; it’s also the most lucrative. It accounted for about 21% of Amazon’s first-quarter sales, yet represented around 59% of its operating profit, driving the overall operating margin to a record high of 13.1%.

To support this booming sector, Amazon has also increased its hardware investments. Its custom chip business alone is bringing in more than $20 billion annually, marking an increase of almost 40% from the previous quarter. They announced over $225 billion in contracts for their Trainium chips, which is impressive.

By producing its chips, Amazon aims to lessen reliance on outside manufacturers. This could save the company billions in annual investments while also improving profit margins in AWS over time.

Investment for Growth

However, the company must commit substantial investments to seize these growth prospects.

Amazon is looking to allocate about $200 billion in capital expenditures by 2026, with $43.2 billion spent just in the first quarter, mainly focused on AWS and AI initiatives. This level of spending has nearly diminished free cash flow, which has been reduced to about $1 billion in the past year, a stark decline from previous levels.

Yet, the firm believes this investment is justified.

“This is truly a once-in-a-lifetime opportunity,” Jassy pointed out.

So what’s the cost for investors wanting in on this growth? Amazon’s price-to-earnings ratio is around 31, which makes it somewhat pricey, though not exorbitantly so. 

Of course, there are risks, especially tied to that significant spending. If returns from AI don’t meet expectations, those big investments could lead to squeezed profits and cash flow longer than investors would prefer. Additionally, rising component costs could pose challenges; Jassy mentioned that demand for memory has outpaced supply, pushing prices up.

But if I had to choose one AI stock to invest in and hold for the next decade, my instincts lean toward Amazon.

With its position as the largest cloud platform globally and its accelerating momentum, plus an increasing order backlog, it has a lot going for it. The company is also innovating by designing its own chips, which should help lower costs in the long run. Ultimately, I think that investing significantly is just part of staying ahead of what Jassy calls “a once-in-a-lifetime opportunity.” If anyone can afford to take such steps, it’s certainly Amazon. They are pouring funds into this growth potential.

It won’t be a straightforward journey, as the recent weeks have shown. Still, I believe Amazon’s stock is positioned to perform well over the next ten years.