AI Stocks Poised for Growth: AMZN, GOOGL

AI Stocks to Buy

Shares of Amazon and Alphabet have decreased slightly year-to-date, even with a 2% return in the S&P 500. However, some Wall Street analysts foresee considerable gains in these stocks within the next year.

Amazon

Amazon's investment potential lies in its strong position in three expanding markets. It operates the most popular online marketplace outside of China, accounting for approximately 41% of U.S. retail e-commerce sales. Amazon is also the largest retail media company, capturing about 77% of domestic retail ad spending and 40% of global retail ad spending. Amazon Web Services (AWS) is the leading public cloud, holding a 29% market share in infrastructure and platform services. With a vast customer and partner base, AWS is well-positioned to benefit from the rising demand for AI infrastructure. Amazon is utilizing AI to enhance productivity and efficiency across its retail operations. CEO Andy Jassy mentioned the development of around 1,000 generative AI tools to improve warehouse robots, inventory allocation, and delivery routes. These advancements, along with the ongoing restructuring of its logistics network, are expected to boost retail margins in the coming years.

Amazon might face challenges due to tariffs. Morgan Stanley estimates that 60% of marketplace sellers have some exposure to China, and Chinese sellers contribute significantly to advertising revenue. Nevertheless, Andy Jassy believes the company's diversified seller base will allow it to withstand challenging conditions. Wall Street anticipates a 10% annual increase in Amazon's earnings through 2026. Amazon has surpassed consensus earnings estimates by an average of 21% in the past six quarters. If this trend continues, the current stock price appears reasonable.

Alphabet

The investment rationale for Alphabet is centered on significant opportunities in digital advertising and cloud services. Alphabet is the largest ad tech company globally, and digital ad spending is projected to grow at 15% annually through 2030. While Alphabet's market share has been declining, it maintains a strong ability to engage users through platforms like Chrome, Google Search, and YouTube. Alphabet is integrating AI tools, such as generative AI overviews in Google Search, which are driving higher usage and satisfaction. Gemini 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. Google may continue to outperform competitors due to its strengths in large language models and AI infrastructure. Alphabet also has a major opportunity in autonomous driving technology through Waymo, which provides 250,000 driverless rides per week across four U.S. cities, a fivefold increase from last year.

Alphabet is dealing with potential antitrust lawsuits. A federal judge will propose fixes for its internet search monopoly in August, and another will rule on its ad tech monopoly at a later date. Wall Street estimates that Alphabet's adjusted earnings will increase at 7% annually through 2026. Alphabet has exceeded consensus estimates by an average of 14% in the last six quarters. The current valuation would be reasonable if that trend persists. Investors might consider a small position, but it may be wise to await more clarity before making a substantial investment.