Tech

Amazon AI Potential Undervalued, Targets Set to $240

Amazon has launched over twice the number of AI services compared to Microsoft and Google combined since 2023.

By Alex P. Chase

7/11, 11:39 EDT
Apple Inc.
Amazon.com, Inc.
Alphabet Inc.
Microsoft Corporation
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Key Takeaway

  • Analysts highlight Amazon's strong AI potential, with BMO and JPMorgan setting price targets of $220 and $240, respectively.
  • Citi identifies 19 undervalued global stocks with medium AI exposure, including JD.com, Samsung Electronics, and Apple.
  • Goldman Sachs raises concerns over excessive AI spending by tech megacaps like Amazon and Alphabet, warning of potential valuation risks.

Amazon's AI Potential

Investors may be underestimating Amazon's potential in the artificial intelligence (AI) sector, according to several analysts. BMO Capital Markets' Brian Pitz highlighted that Amazon has launched over twice the number of AI services compared to Microsoft and Google combined since 2023. "We believe investors are underestimating AMZN’s positioning to win its fair share of AI workloads and believe its platform approach with Bedrock will be a winning strategy over the long term," Pitz stated. He has an outperform rating on Amazon with a price target of $220, indicating a 10% upside from Wednesday’s close.

Amazon's AI initiatives are expected to support ongoing and accelerating revenue growth through 2024, with more than 20% growth anticipated in 2025, according to JPMorgan analyst Doug Anmuth. He views Amazon Web Services (AWS) as offering a "best-in-class" array of large language models and foundation models tailored to developer needs. Anmuth has an overweight rating on the stock and a $240 price target, implying a 20% upside. Amazon shares have rallied about 30% year to date.

Citi’s Ronald Josey also reaffirmed his confidence in AWS estimates for the second quarter and beyond, following Amazon's recent AWS summit in New York. He believes demand is gradually moving toward companies offering multiple specialized models. Josey retained a $245 price target on Amazon shares, calling the stock a top Internet pick, with the price target implying a 23% upside from Wednesday’s close.

Broader AI Market Trends

Citi has identified several undervalued global stocks exposed to AI that present substantial investment opportunities. According to Citi, these stocks have seen improved earnings expectations but have not experienced significant increases in their valuations, making them attractive for investors looking to capitalize on the AI trend without paying premium prices. AI has driven approximately half the 11% return in the MSCI All Country World Index so far this year, despite AI-exposed stocks accounting for only 14% of the index’s total market capitalization.

Citi strategists, led by Drew Pettit and Beata Manthey, noted that many AI stocks have benefited from both expanding multiples and upward earnings revisions. However, they identified a subset of 19 stocks with medium AI exposure that have not yet experienced significant price-to-earnings expansion. Notable companies on this list include JD.com, NAVER, Aptiv, Dynatrace, Samsung Electronics, Telenor, SS&C Technologies Holdings, HubSpot, Visa, Toyota Motor, DocuSign, Cognizant Tech, ServiceNow, Autodesk, HOYA, Honeywell International, Digital Realty Trust, Airbnb, and Apple.

Concerns Over AI Spending

Goldman Sachs Group Inc. strategists have raised concerns that US technology megacaps are spending excessively on AI. Companies referred to as "hyperscalers" — including Amazon, Meta Platforms, Microsoft, and Alphabet — have utilized about $357 billion for capital expenditure and research and development in the past year, with a significant portion allocated to AI. This spending represents nearly a quarter of the S&P 500’s total for capex and R&D.

"Today’s hyperscalers will eventually be required to prove that revenues and earnings will be generated from their investments," wrote Ryan Hammond, a Goldman Sachs strategist. "Early signs that may not be generated could lead to valuation de-rating." Amazon is expected to utilize $63 billion for capex this year, an increase from $53 billion in 2023. Meta and Google-owner Alphabet are also projected to spend record amounts in 2024.

Despite the buzz around AI powering US stocks to record highs this year, some investors are concerned about the sustainability of this trend. The strategists noted that current AI spending still pales in comparison to capex levels seen during the dot-com crash. At the height of the tech bubble, tech, media, and telecom stocks were spending more than 100% of cash flows from operations on capex and R&D, whereas today, the total bill stands at 72%.

Street Views

  • Brian Pitz, BMO Capital Markets (Bullish on Amazon):

    "While consensus believes that AMZN lags behind its mega-cap peers in AI capabilities, AMZN highlighted that it has launched over two times the number of AI services than MSFT and GOOGL combined since 2023. We believe investors are underestimating AMZN’s positioning to win its fair share of AI workloads and believe its platform approach with Bedrock will be a winning strategy over the long term."

  • Doug Anmuth, JPMorgan (Bullish on Amazon):

    "AWS offers a 'best-in-class' array of large language models and foundation models tailored to developer needs."

  • Ronald Josey, Citi (Bullish on Amazon):

    "[I] reaffirmed confidence AWS estimates for the second quarter and onward following the event... demand is gradually moving toward companies offering multiple specialized models."