Amazon Emerges as the Most Undervalued AI Stock

Analysts are highlighting Amazon (AMZN) as a significantly undervalued player in the artificial intelligence (AI) space, despite its stock lagging behind the S&P 500 index over the past five years. While the S&P 500 has surged 88% in that time, Amazon's shares have only gained 51%. However, experts like Evercore's Mark Mahaney believe the tech giant is poised to flip from an AI laggard to a leader, with a price target of $355 on its stock, currently trading around $250.

The primary driver of this optimism is Amazon Web Services (AWS), which benefited from the AI infrastructure boom. AWS, the world's leading cloud infrastructure provider, is becoming the preferred platform for training and deploying AI services. Last quarter, AWS revenue grew 37% year over year to $42.2 billion, a substantial acceleration from previous quarters. This growth is expected to continue, supported by increasing backlogs and investments in new data centers.

Beyond AWS, Amazon is integrating AI into its e-commerce, retail, and services divisions. AI search tools are enhancing customer experience, AI-driven advertising is improving targeting, and automation is streamlining supply chain operations, including warehouse sorting and drone delivery. While the North America retail business grew 16% last quarter to $116 billion, margins remain thin due to these investments, with long-term potential for expansion.

Overall, Amazon's stock appears undervalued, even with a $2.7 trillion market cap. AWS's annualized revenue rate (ARR) is $169 billion, with a 35% profit margin, contributing significantly to the company's earnings. The rest of Amazon's businesses could grow to $800 billion in revenue over the next few years, with margin expansions due to AI and automation. Based on these projections, Amazon's forward earnings multiple is just 17, suggesting strong long-term value.