Did Amazon Just Say “Checkmate” to Nvidia?

Amazon just announced another strategic alliance as it builds out its AI roadmap.

Much of the ongoing discussion on artificial intelligence (AI) revolves around the “Magnificent Seven” stocks. Over the past 18 months, big tech has made a series of headline-grabbing, billion-dollar investments in AI initiatives.

Among leading enterprises in the Magnificent Seven are Nvidia and Amazon (AMZN -1.61%). While Nvidia seems to have a strong pulse across all facets of the AI arena, I wouldn’t over appreciate the company’s dominance.

Let’s dig into what is driving Nvidia’s growth right now, and explore how Amazon may leapfrog the company in the long run.

Nvidia is the AI chip leader, but…

Nvidia designs sophisticated semiconductor chips called graphics processing units (GPUs). GPUs have all sorts of applications ranging from training large language models, machine learning, autonomous driving, and more.

Beyond the tech sector, generative AI has use cases in healthcare as well. Nvidia’s GPUs are even being used by leading pharmaceutical companies such as Novo Nordisk — the maker of Ozempic and Wegovy.

Unsurprisingly, Nvidia’s prolific reach has helped the company amass a staggering 80% share of the AI chip market.

While it may seem as if Nvidia’s lead is insurmountable, keep in mind that the AI revolution is still in its early stages. Although Amazon might look behind, I’d argue that the company is merely pacing itself and preparing for a marathon-style race.

Image Source: Getty Images.

…some in big tech are making moves of their own

The AI startup scene is absolutely packed. One of the more notable players is a machine learning company called Hugging Face, a unicorn that boasts Salesforce, Amazon, Google, Nvidia, Intel, Advanced Micro Devices, Qualcomm, and IBM as investors.

Do you notice anything from that investor syndicate? Many of them are either chip companies or cloud computing specialists.

Conveniently, Amazon is both. In addition to Amazon Web Services (AWS), Amazon is developing a line of training and inferencing chips. Aptly named Trainium and Inferentia, these chips are igniting new sources of growth for AWS as cloud computing becomes evermore competitive.

Moreover, Hugging Face recently announced that it is partnering with AWS to deploy workloads on the newest version of Inferentia. I see this as a big win for Amazon, and it ultimately serves as stepping stone for the company to migrate away from a reliance on Nvidia products in the long run.

Another way Amazon is starting to build some momentum is from its $4 billion investment in another AI startup, Anthropic. Like Hugging Face, Anthropic is training its generative AI models on Amazon’s Trainium and Inferentia chips and is also using AWS as its primary cloud provider.

If this weren’t enough to depict Amazon as a serious contender in the AI realm, consider the company’s planned $11 billion investment to build data centers. While Nvidia also competes in the data center space, companies such as Amazon and Oracle have their own plans.

Is now a good time to invest in Amazon stock?

Right now, Amazon stock trades for roughly $179 per share. This is quite close to the company’s all-time high of $189.

With that in mind, you might think Amazon stock is expensive. However, the chart below indicates something different.

AMZN PE Ratio Chart

AMZN PE Ratio data by YCharts

Over the past 12 months, Amazon’s share price has risen by roughly 50%. By contrast, the company’s trailing-12-month earnings per share (EPS) has increased by 181%.

Since the company’s earnings growth is accelerating more than the share price, Amazon’s price-to-earnings (P/E) multiple actually declines year over year. This means that even though the share price is touching all-time highs, Amazon is technically cheaper today than it was just last year.

I think Amazon is underappreciated when it comes to AI. The company is investing aggressive sums and is already igniting some newfound momentum. Over time, I suspect that the moves the company is making today will pay off in spades and provide Amazon with a layer of flexibility over the competition.

To me, Amazon stock is dirt cheap and represents a compelling long-term opportunity in the AI space. While Nvidia will probably remain the posterchild of AI in the near-term, I think Amazon is making some savvy chess moves that will ultimately set it up as a superior long-term position.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Adam Spatacco has positions in Amazon, Novo Nordisk, and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Amazon, Nvidia, Oracle, Qualcomm, and Salesforce. The Motley Fool recommends Intel, International Business Machines, and Novo Nordisk and recommends the following options: long January 2025 $45 calls on Intel and short May 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.

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