Amazon Looks Undervalued Amid Strong AI Growth Prospects

The 'Magnificent Seven' tech stocks have been standout performers, but not all have kept up with the market this year. Nvidia ($5.8 trillion) leads the group, while others, like Amazon (AMZN), have underperformed. Amazon's stock, which has typically traded at high earnings multiples, now appears significantly undervalued compared to its decade-long average.

Since the start of 2024, Amazon's stock has risen 65%, slightly outperforming the S&P 500's 63% gain. Despite this, the company's strong growth prospects, particularly in artificial intelligence (AI), suggest a bigger rally could be on the horizon. Amazon Web Services (AWS) remains a key growth driver, with a 37% increase in the June quarter and overall revenue growth of 20%.

AI is also boosting Amazon's emerging chip business, which reported triple-digit growth. Both the chip business and AWS's AI segment have annual revenue run rates exceeding $25 billion. With $776 billion in revenue over the past four quarters, Amazon's growth potential in AI could justify a higher earnings multiple, making it a compelling long-term investment.