Amazon May Be Set to Seize a Once-in-a-Lifetime Opportunity. Here's How Investors Can Benefit.
Amazon is poised to capitalize on a significant opportunity in the chip market, leveraging its AWS platform and in-house designed chips like Trainium. With a current annual revenue run rate of $20 billion from its chips, this could potentially increase to $50 billion if sold to third parties. The company aims to reduce costs and enhance revenue through this new venture, making it an attractive investment. Investors are encouraged to buy Amazon stock at reasonable levels or hold for long-term gains as the chip business develops.
Amazon (AMZN +3.47%) is involved in many industries, from healthcare to entertainment, but the company's biggest businesses are e-commerce and cloud computing. And in these areas, Amazon is a global leader. Amazon's presence in these fields, touching both consumer and corporate spending, has helped the company build an empire -- and generate billions of dollars in earnings.
In the latest full year, sales and net income increased in the double digits to $716 billion and $77 billion, respectively. The company is seeing growth in e-commerce and cloud unit Amazon Web Services (AWS), and artificial intelligence (AI) is showing itself to be a particularly powerful revenue driver. In fact, this hot technology may lead to yet another explosive growth business for the tech giant.
Amazon might be about to seize a once-in-a-lifetime opportunity. Let's find out how you, as an investor, can benefit.
Image source: Getty Images.
Using and developing AI
So, first, let's take a look at Amazon's role in AI so far. The company uses the technology across its e-commerce business, and through AWS, it develops AI products such as chips and platforms, and also offers the AI products and services of others -- such as Nvidia's top chip systems. Since AWS is the world's biggest cloud service provider, it's well-positioned to capture demand. In many cases, customers seek to maintain all of their workloads within the same system, so AWS could easily attract the AI business of current non-AI cloud customers.
Among AWS' broad range of offerings, customers will find a wide variety of chips too. And one particular type of product that's stood out in recent quarters is Amazon's own in-house designed AI chip. This is the Trainium product, built to serve customers who want solid performance -- but at a reasonable price. Amazon has pretty much sold out of Trainium2 chips, and Trainium3, which just began shipping, is on the same path. The company says Trainium3 is "nearly fully subscribed."
And Amazon says a great number of Trainium4 chips, which aren't even available yet, have already been reserved.
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Key Data Points
A familiar situation
This story is familiar to Amazon as it's been down the same road with Graviton, its in-house designed central processing unit, or CPU -- these are the main chips used in computers. AWS used to run workloads on Intel CPUs until introducing Graviton in 2018; today, almost all of its workloads run on Graviton. As an example of the chip's popularity, two major AWS customers asked if they could buy all Graviton capacity this year. (AWS declined, as Amazon aims to serve a broad range of customers.)
Now, let's talk about the once-in-a-lifetime opportunity that Amazon suggests it may seize: And that's the opportunity to create a stand-alone chip business.
AWS has "an opportunity to build what could be a new pillar for Amazon in chips," chief Andy Jassy wrote recently in his letter to shareholders.
Amazon's chips, including only in-house products like Graviton and Trainium, have reached an annual revenue run rate of $20 billion. And this is because they are offered uniquely to AWS customers. Jassy says that if the company sold these chips to AWS customers and third parties right now, the annual revenue run rate would be about $50 billion.
Saving on costs
So this could be a significant revenue engine for Amazon -- and on top of that, relying on these chips rather than depending heavily on chips of others will result in cost savings for the company. By scaling Trainium, Amazon may save "tens of billions of capex dollars per year," according to Jassy.
All of this suggests Amazon could be on track to develop a new major business -- chips. How can you, as an investor, benefit? Such a venture may boost revenue much more quickly than an older business like e-commerce -- but, like Amazon's other units, a chip one also would be a long-term effort. And the chip revenue opportunity could contribute positively to revenue well into the future.
All of this means, to benefit, it's a good idea to pick up Amazon stock when it's trading at a reasonable level -- such as today at 33x forward earnings estimates -- or if you're already a shareholder, plan to hold on for the coming years. Though Amazon may deliver impressive gains in the near term, the chip opportunity, a once-in-a-lifetime one, could generate an even bigger win over time.
