Amazon Stock Up 30% But Huge AI Bet May Not Restore 27% Growth (2024)

Amazon has pioneered enormously important new industries.

However, that happened before founder and CEO Jeff Bezos handed over the CEO job in July 2021. Amazon’s contributions include online selling of everything from books to video streaming and transforming its computer systems into a new industry — cloud services.

Despite continuing to lead the industry, Amazon Web Services is growing more slowly than Microsoft’s Azure. What has made the difference between the two is Microsoft’s generative AI strategy — featuring a $13 billion bet on OpenAI — maker of ChatGPT.

By 2026, Azure could overtake AWS, noted a February Forbes post. Since then, Amazon announced a generative AI strategy in April, noted Yahoo! Finance, and last month shared a plan to invest more than $100 billion in data centers by 2034, reported the Wall Street Journal.

Can CEO Andy Jassy turn generative AI into a third groundbreaking Amazon innovation? If so, can the e-tailing giant restore the 27.4% average annual revenue growth achieved between 2010 and 2020?

Here are three reasons that ambition could be out of reach:

• Outside of AI chips, the revenue opportunity for generative AI is small.
• Amazon is playing catch up against a formidable rival in generative AI cloud services and software.
• Unless the company’s generative AI strategy wins Amazon a significant share of a large, fast-growing market, meaningfully-faster growth from its generative AI strategies could be elusive.

I have contacted Amazon for comment and will update this post should I receive a response.

Amazon’s Generative AI Strategy

Strategy defines an internally-consistent set of choices about how an organization intends to achieve its goals. A generative AI strategy would set specific revenue goals over time and make clear choices along dimensions needed to achieve the goals, such as:

• Target customers. Which customer groups in which geographies will the company serve?
• Products. Which products or services will the company provide to these customer groups?
• Approach to product development. Will the company develop these products internally, through partnership, or by acquisition?
• Pricing. Will the company offer a good product at the lowest price or the best product at a high price?
• Critical activities. How will the company design, build, deliver, market, sell, and service its products?

Amazon’s generative AI strategy is vague on some of these dimensions and clearer on others.

• Generative AI revenue goals. While Amazon has articulated a broad vision, the company has not articulated specific generative AI revenue targets. “The amount of societal and business benefit from the solutions that will be possible will astound us all,” Jassy wrote in an April shareholder letter, according to Yahoo! Finance. “We’re optimistic that much of this world-changing AI will be built on top of AWS.”
• Target customers. Amazon aims to satisfy “enterprise customers’ and consumers’ generative AI needs,” Jassy noted, according to Yahoo! Finance.
• Products. Amazon has “all of the pieces in place to be the go-to tech firm for both” customer groups, noted Jassy in the shareholder letter. Amazon strives to meet customer needs by being the everything store for generative AI hardware and software, I noted in my book Brain Rush. Amazon’s offerings include Graviton CPUs, Trainium large language model training chips, Inferentia LLM inferencing chips, the Rufus chatbot for Amazon’s Marketplace and Amazon Q, “which writes and debugs code for AWS users,” noted Yahoo! Finance. Excluded from Amazon’s generative AI products is a “next-gen” Alexa demonstrated to the press in September 2023. “The new Alexa is reportedly far from ready for prime time — the result of insufficient training data, inadequate access to training hardware and other roadblocks,” noted TechCrunch.
• Approach to product delivery. “Customers don’t want only one model,” Jassy wrote in his letter. “They want access to various models and model sizes for different types of applications.” To that end, Amazon delivers its generative AI products through partnerships and internal development. For example, Amazon offers LLMs through partnerships with Anthropic — in which the company invested $4 billion, Stability AI, Mistral, Meta, Cohere, and Amazon’s own models, noted Jassy. Amazon plans to invest $230 million on startups building generative AI apps, according to TechCrunch.
• Pricing. I have not found any information about whether Amazon would seek to offer good products at the lowest price or the best products at a price premium.
• Critical activities. AWS’ data centers will be the essential delivery mechanism for Amazon’s generative AI strategy. Amazon’s more than $100 billion investment in cloud computing and AI infrastructure over the next decade will exceed “its sprawling network of e-commerce warehouses,” the Journal reported.

To be sure, Amazon could be much clearer in its internal communications than on its public ones. For investors, the most important area of vagueness is how much revenue, Amazon expects to earn from generative AI.

Due to the intensive computing resources required to train and operate LLMs, “Amazon expects tens of billions of dollars in revenue from AI in the next several years,” the Journal noted.

To put that into perspective, AWS generated $90 billion in revenue — roughly 16% of Amazon’s total 2023 revenue of $575 billion. With Amazon’s total revenue having grown 12% in 2023, $10 billion more in AWS revenue would have added a mere two percentage points to the company’s growth rate in 2023.

AWS’ Rivalry With Microsoft Azure

AWS maintains a lead in the cloud services market — yet Microsoft’s Azure is growing more rapidly and slowly closing in on AWS’s lead.

In the fourth quarter of 2023, Microsoft Azure was growing faster than AWS — raising the prospect of Azure surpassing AWS as the cloud services industry leader by 2026, according to my February 2024 Forbes post.

AWS is growing far more slowly than Microsoft’s Azure cloud infrastructure unit. In the fourth quarter of 2023, AWS lost two percentage points of market share to 31% while Azure added two percentage points to 24%, according to CRN.

In the final quarter of 2023, AWS grew 13% while Azure revenue increased by 30%, noted CNBC.

If those trends continue, Azure — which was growing faster due to the payoff from Microsoft’s estimated $13 billion investment in OpenAI — was in a position to surpass AWS.

To be sure, AWS grew faster in the first quarter of 2024 — narrowing its growth disadvantage by three percentage points. However, Azure maintained its growth Specifically, AWS’s revenue grew 17% in Q1, according to CNBC, compared to Azure’s 31% growth in the quarter, CRN noted.

In the first quarter of 2024, AWS maintained its 31% share of the cloud services market while Microsoft’s Azure gained one percentage point to 25% of the market, according to Statista.

Will Amazon’s Generative AI Strategy Restore 27.7% Revenue Growth?

Amazon’s stock outperformed Microsoft’s in the first half of 2024. Specifically, Amazon shares rose 30% yielding a $2.07 trillion market capitalization. By contrast, Microsoft’s stock rose 22% to a market capitalization of $3.4 trillion during the period, according to Google Finance.

Microsoft’s stock performance lagged despite growing faster and more profitably than Amazon in the first quarter. The software’s giant’s revenue increased 17% with a net margin of 35.5%. Amazon’s revenue rose 12.5% in the first quarter with a relatively slim net margin of 7.3%, Google Finance noted.

Will Generative AI help Amazon grow faster? Jassy told analysts in late April that AWS had already reached a "multibillion-dollar" revenue run rate related to artificial intelligence, noted Investor’s Business Daily.

Amazon — which put former sales and marketing leader Matt Garman in charge of AWS on June 3 — has the right products but has been weaker at marketing. "I think the focus for Jassy over the next year will be to catch up to Microsoft in the generative AI race, at least based on investor perception," CFRA analyst Arun Sundaram told IBD.

“That's how I see the stock building on its gains,” he added.

Amazon stock could have more upside than Microsoft’s. Based on 42 analysts offering 12-month price targets, Amazon stock could rise 13.7% to hit the $221.70 average, noted TipRanks. The 35 analysts offering 12-month price targets for Microsoft see 11% upside to the $500.71 average target, TipRanks, wrote.