Amazon's Impressive 44.4% Rally in 2024

In 2024, shares of retail and cloud computing giant Amazon (AMZN) saw a remarkable increase of 44.4%, as reported by S&P Global Market Intelligence. This surge aligns with the trend observed among the "Magnificent Seven," a group of major tech stocks that attracted significant investor interest throughout the year, mainly due to their involvement in the artificial intelligence (AI) movement.

Despite entering 2024 with questions about its position in the AI race, Amazon worked hard to calm investor concerns. Many were worried that Amazon was lagging behind its competitors, particularly Microsoft, which had early investments in OpenAI, the firm behind ChatGPT.

Amazon Strengthens Its AI Offerings

As skepticism grew about Amazon's late entry into the AI arena, the company made strategic moves to enhance its capabilities. Amazon is the largest cloud service provider and began launching its own AI cloud services, such as Bedrock, in mid-2023. Amazon Bedrock provides developers with access to a range of competing large language models, establishing Amazon as a significant player with a broad AI toolkit.

In a bid to bolster its AI investments, Amazon made a noteworthy investment in Anthropic, an alternative to OpenAI, led by former OpenAI research VP Dario Amodei. This partnership saw further investments totaling $8 billion by November 2024, solidifying Anthropic's role as a critical competitor in the AI space. As part of the agreement, Anthropic pledged to utilize Amazon Web Services (AWS) as its main cloud infrastructure and to use Amazon’s unique chips for AI model training.

This collaboration reinforced both companies' positions in the AI industry while showcasing Amazon's chip technology as a viable alternative to expensive Nvidia graphics processing units (GPUs).

However, Amazon's success wasn't driven solely by investment announcements. The company's financial performance also played a crucial role. In the third quarter, AWS revenue growth accelerated to 19%, up from 12% in the previous year, while operating margins increased from 30.3% to 38.1%. This improvement highlighted AWS's strategic importance to Amazon's overall growth.

Moreover, Amazon's e-commerce sector experienced similar growth, with both North America and International segments showing solid gains in the high-single-digit and low-double-digit percentages, respectively. Noteworthy was the expansion of North America's e-commerce operating margins from 4.9% to 5.9%, while the International sector transitioned from a -0.3% margin to a positive 3.6%.

Amazon's recent efforts to optimize costs and implement a regional delivery system appear to be paying off, as evidenced by this significant margin growth.

Long-Term Investment Perspective

Historically, Amazon has shown resilience during economic downturns, managing to navigate challenges such as bear markets effectively. Following a tough period after the pandemic, the improvements in the past year reflect Amazon’s strong leadership and innovative spirit, even in the wake of founder Jeff Bezos's retirement in 2021.

While Amazon stock is currently trading at 35 times the forecasted earnings for this year, which some may view as high, the company's focus on long-term growth often attracts investors willing to pay a premium. The ability to enhance profit margins amidst rising interest rates similarly highlights Amazon's adaptability.

Overall, with its commitment to innovation and sustainable returns, Amazon stands as a wise choice for investors looking to hold a robust asset for at least five years.

Amazon, AI, Investments