Cathie Wood Highlights Software as the Next Significant Space for AI Development – a Potential $2 Trillion Investment You'd Regret Missing Out on If She's Accurate
Cathie Wood, the founder of Ark Investment Management, champions several exchange-traded funds (ETFs) focusing on innovative technology stocks. She sees software companies as the next significant opportunity in the artificial intelligence (AI) sector, predicting they could generate $8 in revenue for every $1 invested in chips from suppliers like Nvidia. Since making this assertion, Wood has demonstrated her conviction by pouring funds into leading AI start-ups such as OpenAI, Anthropic, and xAI through the Ark Venture Fund. Moreover, Ark's ETFs hold prominent AI stocks like Tesla, Alphabet, and UiPath.
If Wood's beliefs on AI software companies prove valid, Amazon (AMZN -4.60%) could potentially be one of the most advantageous beneficiaries.
A leader in AI infrastructure and software
Amazon is among the five American companies valued at $2 trillion or higher, and each is vying for AI dominance. However, this company holds a unique edge - Amazon Web Services (AWS), the world's most significant cloud computing platform. It provides businesses with numerous services to facilitate their digital transformation and serves as a primary hub for an expanding suite of AI services.
AWS aims to control all three AI layers: data center infrastructure, large language models (LLMs), and software. Amazon operates data centers housing Nvidia's GPUs, but it also manufactures its custom chips, Trainium (for AI training) and Inferentia (for AI inference). Amazon claims developers can save 50% on training costs with Trainium1 versus competing chips, and with Trainium2 now available, savings could escalate further.
Furthermore, Amazon offers developers access to industry-leading LLMs, such as Anthropic's Claude 3.5, Meta Platforms' Llama 3.2, and Amazon's Titan family of models, through Amazon Bedrock. Most developers will opt for third-party LLMs to construct AI software as building an LLM from scratch calls for substantial financial resources.
At the software layer, Amazon developed a virtual assistant named Q. It can answer questions regarding an organization's internal data and policies and generate computer code to expedite software development. Q boasts the highest code acceptance rate in the industry, saving Amazon $260 million and over 4,500 developer years on a single project.
During the third quarter of 2024 (ending Sept. 30), AWS generated a record $27.4 billion in revenue, representing a 19.1% increase year-over-year, marking the fastest growth rate in 2024 thus far, owing partially to AI. Amazon reveals that the AI business within AWS is currently expanding at a triple-digit percentage rate compared to the previous year and is growing three times faster than the cloud division at a similar growth stage.
AI is reshaping online shopping and advertising
Although most investors focus on AWS, e-commerce remains Amazon's largest segment, accounting for $61.4 billion of the company's $158.9 billion in total revenue during Q3. Amazon strives to optimize efficiency within the e-commerce segment to enhance profit margins, and AI plays a crucial role in this undertaking.
For instance, Amazon launched Project Private Investigator in its fulfillment centers earlier this year, utilizing AI and computer vision to weed out defective items before shipping, reducing return rates. The company also continues to improve its Rufus virtual shopping assistant, which can respond to customer queries and recommend products.
Sellers can benefit from Amelia, a robust virtual assistant capable of answering operational questions, managing inventory, and even anticipating sales. Amelia can minimize costs by streamlining workflows and improving efficiency, potentially translating into lower prices for customers.
Amazon also boasts a flourishing advertising business. Amazon.com receives 3.4 billion visits per month, providing retailers with an excellent platform to market their products, as well as showcasing ads on platforms like Prime Video and Twitch. Merchants can utilize a suite of AI tools to swiftly generate advertisements, capable of transforming views into sales.
Advertising revenue totaled $14.3 billion during Q3, but this figure is expected to surge in the future, as ad rollouts on platforms like Prime Video are still in their infancy. Additionally, since AI can turn almost any business owner into a marketing expert, Amazon's tools could help the company draw a larger share of ad spending down the line.
Amazon stock may present substantial long-term growth prospects
The rapid expansion of AWS and the emphasis on e-commerce efficiency have fueled Amazon's bottom line. The company posted $4.67 in earnings per share over the past four quarters, marking a staggering 143% increase from the previous four-quarter period.
Based on Amazon's stock price of $208.91 as of this writing, it currently trades at a price-to-earnings (P/E) ratio of 44.7. Although this ratio might seem expensive in light of the Nasdaq-100 technology index's P/E ratio of 33.1, it indicates that Amazon stock has ample potential for long-term growth.
However, Wall Street's anticipated earnings per share for Amazon next year (as per Yahoo!) suggests a notable increase to $6.15. This placement gives Amazon a forward P/E ratio of approximately 34, which is rather close to the Nasdaq-100.
I firmly believe, however, that the stock should trade at a premium compared to the Nasdaq-100. If it manages to maintain its current P/E ratio of 44.7, this could potentially lead to a return of around 31% next year. Furthermore, considering its impressive earnings growth rate, I wouldn't be astonished if Wall Street's 2025 forecast turns out to be significantly underestimated.
As previously stated, Cathie Wood holds the opinion that AI software companies could eventually produce $8 in revenue for every $1 invested in chips. Considering Amazon's projected capital expenditures for this year, mainly diverted towards AI infrastructure and chips, reaching an astounding $75 billion, the long-term reward could be substantial if Wood's predictions prove accurate.
investing in Amazon's stock could provide significant long-term growth prospects, considering its growing AI ventures and impressive earnings growth rate. Wood's prediction of $8 in revenue for every $1 invested in chips, especially with Amazon's substantial capital expenditures in AI infrastructure, could further boost its potential returns.
Amazon's diverse AI offerings, including AWS, Q virtual assistant, and AI-enhanced e-commerce services, have the potential to generate substantial revenue and reduce costs, benefiting both the company and its customers. In the finance sector, Amazon's growing advertising revenue, owing to AI's ability to convert views into sales, could contribute to its overall financial growth.
