This newly issued Dow Jones stock has the potential to create significant shareholder value as the artificial intelligence market expands.
of Dow Jones Industrial Average (^DJI -1.00%) It is the oldest of the three major stock indexes in the United States. It was first calculated by Charles Dow in 1896 as his daily average of 12 industrial stocks, but since then the size and scope of this index has expanded. Currently, Dow Jones tracks his 30 stocks across 9 of his 11 market sectors. Only real estate and public works are excluded.
The Dow Jones is generally considered a barometer of blue-chip stocks. Although inclusion in the index is not governed by strict rules, the selection committee considers companies with good reputations and a history of sustained growth, particularly those that have attracted widespread interest among investors. Focus on companies that are With that in mind, Amazon (AMZN -0.15%) was added to the Dow Jones in February, replacing . walgreens boots alliance. That alone is not much to be happy about, but another development should pique investors' interest.
Despite growing by 950% in the last 10 years. JP Morgan Chase The company still selected Amazon as its “best idea” for 2024, citing three reasons why the company could create more shareholder value.
- Demand for generative artificial intelligence should accelerate cloud revenues.
- Improving delivery speeds should help Amazon gain market share in e-commerce.
- Finally, margins should also expand as advertising sales increase and the company focuses on controlling costs.
Here's what investors need to know.
Amazon was firing on all cylinders in Q4
Amazon reported impressive financial results in the fourth quarter, beating expectations on revenue and bottom line. Sales increased 14% to $170 billion as growth continued to accelerate in all business segments except brick-and-mortar. Sales growth was particularly strong in advertising services and third-party sales services.
Operating margin expanded 600 basis points to 7.8%, and GAAP net income was $1.00 per diluted share, up from $0.03 in the prior year. These improvements were driven by cost control initiatives and the regionalization of fulfillment hubs, increasing the efficiency of the logistics network. In fact, Amazon delivered packages to Prime members at the fastest speed ever in his 2023 year, while at the same time reducing logistics costs per unit for the first time since 2018.
The chart below visualizes Amazon's fourth quarter revenue across each business segment.
Going forward, investors can expect Amazon to maintain its momentum. The company has a strong presence in e-commerce, digital advertising and cloud computing, and CEO Andy Jassy said it will continue to invest in artificial intelligence (AI) products in the coming years. We believe it will generate tens of billions of dollars in revenue.
Quantifying these opportunities, online retail sales are expected to grow 8% annually through 2030, with digital advertising and cloud computing sales growing at 15% and 14% annually, respectively, over the same period. It is expected that. Meanwhile, spending on AI is expected to increase by 37% annually.
Amazon has a strong presence in e-commerce, retail advertising, and cloud computing.
Amazon operates the world's most popular online marketplace, as measured by monthly visitors. This creates particularly strong network effects and creates a durable economic moat for the company. But Amazon is further fortifying itself by supporting sellers with logistics and advertising services and attracting consumers with its Prime membership program. These adjacencies make the market even more convenient and attractive.
Amazon has used its retail success to build a booming advertising business. It accounted for 75% of U.S. retail advertising revenue last year, 10 times more than its closest competitor. This is noteworthy because retail media will be the fastest growing advertising channel through 2027, according to eMarketer. Amazon is also the world's third-largest ad tech company, and the recent addition of ads to Prime Video has created new monetization opportunities.
Finally, Amazon Web Services (AWS) is a leader in cloud infrastructure and platform services, including AI developer services. Its success is the result of continuous innovation.Consulting firm says AWS offers the broadest and most detailed cloud capabilities on the market gartnerThis puts the company in an enviable position for two reasons.
First, JP Morgan analysts estimate that only 10% of IT spending is currently in the cloud. This means investors can expect solid growth for many years as more companies move more workloads to the cloud. Second, Argus analysts believe that due to its leadership in cloud computing, “AWS is uniquely positioned in the fast-growing AI-as-a-Service market,” which means the company is is likely to be a big winner as the AI ​​boom progresses.
With this in mind, Amazon is also investing in AI product development at every layer of the AI ​​stack, as detailed below.
- Infrastructure layer: Amazon has designed custom chips for AI training and inference, called Trainium and Inferentia, at lower prices than currently available alternatives. They cannot outperform it, but Nvidia GPUs are more cost effective in certain situations.
- Model layer: Bedrock is a cloud service that allows businesses to customize large language models from partners like Amazon and Anthropic. These tailored models can be incorporated into generative AI applications.
- Application layer: CodeWhisperer is a generative AI coding assistant that helps software developers work more efficiently. Amazon Q is a generative AI business assistant that can query data and summarize information from a variety of internal and external sources.
Amazon stock trades at a fair price
In summary, Amazon operates the world's most popular e-commerce marketplace. It is also the largest retail advertiser and third largest ad tech vendor. Finally, AWS is a market leader in cloud computing and AI developer services, building new products for every layer of the AI ​​stack.
Taken together, Amazon is on track for double-digit sales growth for years to come. In fact, Wall Street is predicting 11% annual growth over the next five years, but there is room for upside to this forecast, especially if Amazon is successful in monetizing its AI. Either way, the current valuation of 3.3x sales is a reasonable price to pay. Investors should feel comfortable buying a small position in this newly created Dow Jones stock today.
John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool's board of directors. JPMorgan Chase is an advertising partner of The Motley Fool's Ascent. Trevor Jennewine has positions at Amazon and his Nvidia. The Motley Fool has positions in and recommends Amazon, JPMorgan Chase, and Nvidia. The Motley Fool recommends his Gartner. The Motley Fool has a disclosure policy.