Amazon’s AI Innovations: Cautious Opportunity for Investors
Nova AI: Amazon’s Strategic Focus on Artificial Intelligence
Amazon has taken a major step in artificial intelligence by broadening access to its Nova foundation models via nova.amazon.com. This initiative is part of a broader tech evolution as the company seeks to establish its place in the AI sector. Additionally, the launch of the Amazon Nova Act introduces a new AI model designed to perform tasks in web browsers, along with the Nova Act SDK for developers to experiment with this nascent technology.
This strategy places Amazon in direct competition with OpenAI’s Operator and Anthropic’s Computer Use tools in the rapidly advancing agentic AI landscape. Notably, Nova Act has reportedly outperformed its competitors in internal evaluations, achieving a score of 94% on ScreenSpot Web Text, against 88% for OpenAI and 90% for Anthropic.
Strong Q4 Financial Results Highlight Amazon’s Growth
Amazon showed impressive financial results in the fourth quarter of 2024, with total revenues reaching $187.8 billion, an increase of 10% year-over-year. Operating income soared to $21.2 billion, reflecting a remarkable 61% rise compared to the previous year’s fourth quarter.
Amazon Web Services (AWS) remains a standout, reporting a 19% year-over-year growth to $28.8 billion, with an impressive annualized revenue run rate of $115 billion. This growth is particularly notable given existing capacity constraints that may be hindering even more significant expansion.
The Zacks Consensus Estimate predicts 2025 net sales to reach $697.68 billion, indicating a growth of 9.36% from last year’s reported figures. Zacks further estimates earnings for 2025 at $6.32 per share, suggesting a 14.29% increase from the prior year, with these forecasts remaining constant over the last 30 days.
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Find the latest earnings estimates and surprises on the Zacks earnings Calendar.
Capital Investments Point to AMZN’s Long-Term AI Objectives
Amazon’s commitment to AI is evident through its substantial capital expenditure. In the fourth quarter of 2024, the company invested $26.3 billion and plans to maintain similar investment levels throughout 2025, primarily focused on AWS and AI infrastructure.
A key component of this investment is Project Rainier, a partnership with Anthropic intended to develop a cluster of Trainium 2 ultra servers. This setup will host hundreds of thousands of Trainium 2 chips, boasting five times the computing power of the current infrastructure used for training leading cloud models.
Evaluating AMZN’s Valuation Amidst Competitive Pressures
Despite solid performance metrics, Amazon’s valuation invites scrutiny concerning potential short-term growth. The company’s forward 12-month Price-to-Sales (P/S) ratio stands at 2.85X, considerably higher than the Zacks Internet – Commerce industry average of 2.11X. This disparity suggests that the stock may be fully valued at present levels.
AMZN’s P/S F12M Ratio Indicates Valuation Concerns
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Competition in the agentic AI sector is escalating swiftly, driven by significant advances from companies like Microsoft (MSFT), Nvidia (NVDA), and Google (GOOGL). Microsoft is enhancing its business applications with advanced AI agents, incorporating new security features via Microsoft Security Copilot. Google’s partnership with NVIDIA aims to develop next-generation AI hardware, while NVIDIA has introduced its Llama Nemotron series of reasoning models for agentic AI platforms. The collaboration between LTIMindtree and Google Cloud further emphasizes the accelerating enterprise adoption of agentic AI across various industries.
To justify its premium valuation, Amazon needs to show substantial revenue growth from Nova Act in this increasingly contested environment. Over the past six months, AMZN has achieved a 5.7% return, outpacing the wider Zacks Computer & Technology sector, which declined by 5.8%, and the S&P 500’s drop of 1.4% during the same period.
Notably, shares of Alphabet, Nvidia, and Microsoft have also underperformed Amazon, experiencing declines of 5.3%, 10.3%, and 8.2%, respectively, within the same timeframe.
6-Month Performance
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Here’s Why Investors Should Hold AMZN Stock
Though Amazon has made significant investments in AI infrastructure, its revenue from AI remains in early developmental phases. There is uncertainty regarding when these investments will yield meaningful financial results as the company works on building capacity ahead of monetization. Additionally, AWS growth may face moderation due to ongoing supply chain issues related to chip availability and power constraints, although these challenges are expected to ease in the latter half of 2025. Valuation assessments also prompt caution, as Amazon’s strong 2024 performance may have already factored in short-term growth expectations reflected in current stock prices. The competitive landscape for agentic AI includes well-resourced organizations like OpenAI, Anthropic, and Google, adding further uncertainty regarding market share capture in this new sector.
Looking Forward: AMZN’s Strategic Outlook
For current Amazon shareholders, the company’s strategic focus on AI and ongoing dominance in the cloud sector provide valid reasons to retain their positions as 2025 approaches. Improvements in profitability across all divisions underscore operational discipline alongside substantial AI investments.
However, for investors considering new positions, exercising patience may be wise. Waiting for temporary market corrections or definitive signs of success in Nova AI monetization might be more prudent before expanding exposure. While Amazon’s long-term vision in AI appears promising, the transformation is likely to take time, with implications for 2025 and beyond. Currently, AMZN holds a Zacks Rank #3 (Hold). You can see a complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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This article originally published on Zacks Investment Research (zacks.com).
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
