Amazon Stock Looks Cheap as AI Growth Accelerates

Amazon, a member of the so-called "Magnificent Seven" tech stocks, is trading at a historically low valuation relative to its earnings. Despite a strong growth rate, the company has only narrowly outperformed the S&P 500 since 2024. This underperformance suggests that the stock may be due for a significant rally, especially considering its promising opportunities in artificial intelligence (AI).

The tech giant's valuation has historically been high, often trading at more than 50 times its earnings. However, recent figures indicate a much lower valuation, making it appear "ridiculously cheap" compared to its past decade's average. This discrepancy could present a buying opportunity for long-term investors.

Amazon's growth has been driven by Amazon Web Services (AWS), which saw a 37% increase in the June quarter. The company's emerging chip business and AWS's AI segment are also experiencing rapid growth, with both surpassing $25 billion in annual revenue. These factors could unlock the next phase of Amazon's growth story, potentially justifying a higher earnings multiple.

While Amazon's stock has risen by 65% since the start of 2024, this performance has only slightly outperformed the S&P 500's 63% gain. Given the company's strong growth prospects, particularly in AI, a more substantial rally could be on the horizon. Investors might consider adding Amazon to their portfolios, as it could be overdue for a big move upward.