AI Stocks Poised for Growth: Amazon & Alphabet
Source: fool.com
Shares of Amazon and Alphabet have decreased slightly year-to-date, even with the S&P 500's 2% return. However, some Wall Street analysts foresee considerable stock increases for both companies within the next year.
Amazon
Amazon's investment potential lies in its strong position within three expanding markets. It operates the most popular online marketplace outside of China, driving almost 41% of U.S. retail e-commerce sales. Amazon is also the largest retail media company, capturing approximately 77% of domestic and 40% of global retail ad spending. Amazon Web Services (AWS) is the largest public cloud, holding a 29% market share in infrastructure and platform services.
AWS is well-suited to benefit from the increasing demand for artificial intelligence (AI) infrastructure. The company is developing custom chips for training and inference. Amazon is also implementing AI across its retail operations to enhance productivity and efficiency. CEO Andy Jassy notes the company is creating around 1,000 generative AI tools to improve warehouse robots, inventory allocation, and delivery routes. These advancements, combined with logistics network restructuring, should boost retail margins over the next few years.
Amazon may encounter challenges with tariffs. Morgan Stanley estimates that 60% of marketplace sellers have some exposure to China, and Chinese sellers contribute significantly to advertising revenue. Despite this, Andy Jassy believes the company's diversified seller base will allow it to navigate challenging conditions effectively. Wall Street anticipates Amazon's earnings will grow at 10% annually through 2026. Amazon has surpassed consensus earnings estimates by an average of 21% in the last six quarters. If this trend continues, the current stock price is reasonable.
The Takeaway
Although a 44% return in the next year may not be realistic, holding a position in Amazon stock is advisable for patient investors, and now might be a good time to acquire shares.
Alphabet
The investment rationale for Alphabet centers on significant opportunities in digital advertising and cloud services. Alphabet is the largest ad tech company globally, and digital ad spending is projected to increase by 15% annually through 2030. While Alphabet has been losing market share, it maintains a strong ability to engage internet users through platforms like Chrome, Google Search, and YouTube. As internet search evolves toward AI tools, Alphabet is adapting to this trend. Generative AI overviews in Google Search are increasing usage and satisfaction. Gemini, its generative AI application, was the second-most downloaded AI chatbot last year, according to Sensor Tower.
Google is the third-largest public cloud, accounting for 12% of infrastructure and platform-services spending in the first quarter, a 1% increase from the previous year. Amazon and Microsoft lost share during this period. Google's strength in large language models and AI infrastructure may allow it to outperform its peers. Forrester Research has recognized the company as a leader in these categories. Additionally, Alphabet has a major opportunity in autonomous driving technology with Waymo, which currently provides 250,000 driverless rides per week across four U.S. cities, a fivefold increase from last year.
Alphabet faces a potential breakup depending on the outcomes of two antitrust lawsuits. A federal judge will propose solutions for its internet search monopoly in August, and another federal judge will rule on its ad tech monopoly at a later date. While most analysts consider a forced breakup unlikely, the possibility exists. Wall Street estimates Alphabet's adjusted earnings will increase at 7% annually through 2026. Alphabet beat the consensus estimate by an average of 14% during the last six quarters. If this trend continues, the current valuation would be reasonable.
The Takeaway
Alphabet stock could potentially return 45% in the next year if the judges rule favorably in the antitrust cases. However, the stock could also decline significantly if either judge orders a breakup. Investors can consider buying a small position now but should await further clarity before making a large investment.