Amazon (AMZN) AI Investment Drive Higher Revenue

AMZN is expected to report a 9.9% increase in revenue to $157.2 billion from $143.08 billion a year ago.

AMZN's guidance on 01 August 2024, for the period ended 30 Sep, was for revenue between $154.00 billion and $158.50 billion.

The consensus estimate for Amazon.com earnings per share (EPS) is expected to come in at $1.14

Amazon continues to hold the largest market share with its Amazon Web Services (AWS) at 33% of the market in Q2 2024. It is followed by Microsoft Azure with 20% of the market and Google Cloud with 10%. All other cloud infrastructure providers comprise the remaining 37% of the market for Q2.

Cloud services are extensively categorized into IaaS, PaaS, and SaaS, with AWS leading the IaaS sector, whereas PaaS and SaaS markets show significant growth with diverse key players and a combined market value projected in the billions.

Cloud market dynamics are shaped by regional adoption, with North America leading, rapid growth in Asia Pacific, and steady expansion in Europe, while security measures and emerging technologies like AI, ML, edge, and serverless computing are critical to future market evolution.

AWS, the brainchild of retail giant Amazon.com, dominates the global cloud market with a whopping 32% share. The key to AWS’s success lies in:

Its early market entry

Robust technology

Diverse service offerings

Competitive pricing

Exceptional customer support

AWS has effectively cornered the market and established itself as the cloud provider to beat, thanks to its rapid expansion and scale, backed by a well-resourced parent company.

AWS’s dominance can be attributed to its:

extensive range of services

cost-effectiveness

scalability

flexibility

enhanced operational efficiency

Given AWS’s compelling offerings, it is no surprise that they command the largest market share in the IaaS sector.

I would be expecting Amazon AWS to make another significant contribution to its revenue in this upcoming reporting quarter.

AWS's Graviton CPU chips are used by over 90% of its 1,000 largest data center customers. Graviton chips, launched in 2018, are becoming an important part of AWS's overall business. AWS's custom silicon strategy includes AI chips like Inferentia and Trainium.

In 2018, Amazon Web Services launched Graviton, its own line of homegrown central processing unit chips for data center servers. Just six years later, the vast majority of AWS's largest server customers have become Graviton users.

Rahul Kulkarni, AWS's director of compute and AI/ML, told Business Insider that more than 90% of the 1,000 largest elastic compute cloud (EC2) customers are running Graviton chips. Customers can only access Graviton chips through AWS's EC2 servers.

I am more interested to see how much does this CPU chips contribute to Amazon earnings in terms of sales and revenue.

How Amazon.com makes and spends money. Based on latest reported earnings, on an LTM basis. If we looked carefully at how Amazon makes money, we can see that revenue contribution from AWS is growing but still have not surpass the amazon.com North America and International region.

So it would be interesting to see how much AI has helped to power AWS earnings, especially with the new chips that is available through the EC2 server.

What is the Fair Price of AMZN when looking at its future cash flows? For this estimate we use a Discounted Cash Flow model.

AMZN is currently trading below the estimate of fair value ($321.96). It is significantly below the fair value by more than 20%.

So I have confidence that Amazon stock price would be trading higher as AI development should see AWS contribute significantly to its revenue,

If we looked at how AMZN EPS have been coming up, it has met or beaten them over the past few years and the EPS have been on a consistent upward trend.

Considering that Amazon lead the market share, I believe AMZN would do much better.

If we looked at how AMZN have been trading before its earnings, we can see that there is a potential MACD bullish crossover forming if AMZN continue to trade in upside movement, as we have seen GOOGL reporting higher revenue driven by AI demand.

Considering that AMZN is trading above both short-term and long-term MA comfortably, we can see a strong uptrend signal from MTF (multi-timeframe) as well.

I believe we can see a nice upside or surge in stock price after its earnings on 31 Oct.

Considering how Amazon competitor in the cloud space, Alphabet have managed to gain significant improvement in its revenue due to AI demand, I believe Amazon would do much better as the market share from AWS is much higher.

I would be watching the price action on AMZN in today’s trading (30 Oct).

Appreciate if you could share your thoughts in the comment section whether you think Amazon would surprise in its revenue with significant contribution from AWS.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.