Amazon charts its own course on A.I., leaning on its strengths in cloud and e-commerce

Published Tue, Jul 11 202312:40 PM EDT

Consumer-facing artificial intelligence-powered applications have taken the market by storm, but Amazon (AMZN) is opting to concentrate its early efforts on developers and companies using its cloud. Leveraging the power of Amazon Web Services (AWS), the company's approach to AI should lead to differentiated business strength in the years to come. In a recent interview on CNBC , Amazon CEO Andy Jassy outlined the company's AI initiatives in a three-layered approach, providing the tools needed to create, power, and train generative AI applications. The bottom layer includes the computing infrastructure that machine learning models will be run on, combined with Amazon's proprietary chips built for that task at a lower cost for AWS customers. This service should become progressively valuable as computing costs increase and customers look to optimize costs. The middle layer involves offering a foundational model that can be used to build and scale gen AI applications. Amazon provides such services like Bedrock, which offers tools to deploy, customize, and scale, and Titan, a generative large language model (LLM) that can generate, summarize, and translate text. The top layer or the application layer is where companies can build consumer-facing applications like ChatGPT from Microsoft-backed OpenAI and Google's Bard from Alphabet. AWS has also invested $100 million in a generative AI innovation center to offer free training to further the development of artificial intelligence-based applications. Other AI development resources at Amazon include CodeWhisperer, an AI code generator to help developers build applications faster. Amazon's set of AI tools is available to help its customers easily get started in building gen AI-powered applications at a low cost. The Amazon CEO said AI use is not limited to its cloud unit, saying all teams across the company are using AI to enhance the customer experience. Still, investors may have prematurely made their decisions about which companies are the AI industry titans. Shares of fellow mega-cap tech Club holdings Nvidia (NVDA), Microsoft (MSFT) and Alphabet (GOOGL) have soared in the first half of this year from the AI gold rush. Nvidia has seen unrelenting demand for its AI-powered chips while Microsoft and Alphabet's consumer chatbots have been all the rage. Amazon stock has also outperformed during the same period but not necessarily because of AI. Scott Devitt, analyst at Wedbush, told CNBC in an interview that while all the AI attention is on consumer services, Amazon is "improperly characterized as missing the AI cycle." He argued that Amazon is building strong capabilities to deliver in the "next cycle of growth" in the nascent AI market. AMZN YTD mountain Amazon YTD performance Gen AI and LLMs are becoming popular and experts say these technologies will likely be commonplace in the not-too-distant future. These technologies need storage and computing capabilities, all of which AWS provides. That's why Amazon's three layers of web services for AI are going to become increasingly critical as companies build AI capabilities into their own businesses, Devitt explained. "It comes with less fanfare — but make no doubt about it, Amazon is a key player in this industry which is going to be a big driver of growth for the next 10-plus years." Relative to the competition in the generative AI wars, Amazon's focus on the developer community is an "area of business strength," said Andrew Lipsman, an analyst at Insider Intelligence. "It makes sense to zig when everyone else is zagging toward the consumer market." Amazon's AI investment in the cloud while others put their dollars toward AI-driven consumer applications will be a "cumulative advantage" for the company that will build over time, he said in a CNBC interview. "It's hard to say this will pay off immediately, but by being able to focus on the cloud business, where the competition is at least initially focusing more on the consumer side, it's an opportunity for Amazon to cement its advantage in this business and advance in that," Lipsman added. Out of the three mega-cap tech cloud providers (which include Microsoft and Alphabet's Google), AWS has held dominant market share ever since it became the first to launch in 2006. Since then, it's been providing a diverse set of cloud storage, computing, analytics, and other services at market-competitive costs. However, AWS' growth (as the others have as well) has decelerated due to competition and companies cutting costs. Lipsman said AWS is still producing much of Amazon's cash flow. "If there's any place to grow that [AI] advantage it's going to be the still fast-growing and very high margin business." AI in advertising Amazon is not only differentiating its gen AI strategy by leveraging the cloud, but it's also incorporating AI in e-commerce to support its ad business. "Amazon has done particularly well by leveraging its AI capabilities focused on search results being highly relevant to the user. And even though Amazon is delivering a lot of ad impressions on every search result page, it's not detracting from the customer experience," Lipsman said. The competition clearly sets Amazon apart from its retail competitors. "Amazon has about 70% of the retail media advertising market and a big part of it is because they've done such an exceptional job in delivering search ad relevance," according to Lipsman. Amazon has another opportunity to flex its advertising dominance during this year's annual Prime Day event. "Sellers understand they need to spend on Amazon ads to generate Prime Day sales — and lean into more advanced strategies if they hope to get an edge over the competition," according to Insider Intelligence's report on Amazon Prime Day 2023. "Prime Day is about accelerating Amazon's new flywheel of media, advertising and commerce." Amazon Prime Day Amazon Prime Day, the global shopping event that attracts consumers seeking huge cost-saving deals, on a variety of products will be held July 11 and 12 in 24 countries. Coupled with the cloud, e-commerce is the other big piece of what Amazon is all about. The 48-hour event is expected to bring in $8 billion in U.S. e-commerce sales, according to data by Insider Intelligence. That represents a 10% year-over-year growth rate, which Lipsman describes as "healthy but not growing by leaps and bounds like it was pre-pandemic," when it was growing about 60% a year. But Lipsman said the leveling off in growth was eventually to be expected. "The growth in Prime Day is about 4x normal than a typical Amazon day," said Gene Munster, managing partner at Deepwater Asset Management, told CNBC on Tuesday. That means Amazon will generate roughly "7% to 8% of the quarter's retail business over the next two days." The 170 million Prime members in the U.S. will drive most of the activity, accounting for 62% of Prime Day sales worldwide, while non-U.S. sales should deliver $4.9 billion in sales. Since employment in the U.S. has been strong, there has been a resilient level of discretionary spending, but Lipsman pointed to two factors that have been impacting e-commerce growth: pull-forward demand from things like consumer electronics and home furnishings as well as consumers shifting their spending toward travel purchases. Still, Insider Intelligence data shows Amazon Prime Day e-commerce sales will surpass that of competing retailers. Bottom line Jassy's interview offered important insight into how Amazon sees the future of artificial intelligence —and more importantly, its strategy behind accelerating its role in the space. Generative AI is a positive disruptor in the tech industry — but until recently, we haven't gotten a full picture of the cloud and e-commerce giant's vision. But Jassy's comments last week provided a helpful roadmap that makes us believe that as AI becomes mainstream it will be a catalyst for the cloud. This should translate to a reacceleration in AWS, maybe not in the near-term but over a multiyear period. Another catalyst this week is Amazon's annual Prime Day event, which always attracts consumers from all over the world. While growth isn't expected to match up compared to previous years, $8 billion in U.S. e-commerce sales alone over a 2-day period is still very impressive. Amazon is also ahead of its retail e-commerce competitors in terms of sales as well as advertising, a major profit maker for the company. Throughout the year the company has taken steps to cut costs to improve margins. We think there still needs to be more work done on this front. It may need to increase capital expenditures to fund its AI initiatives. However, it may be worth it if the investment delivers strong recurring revenues for its cloud unit over time. (Jim Cramer's Charitable Trust is long AMZN, GOOGL, NVDA, MSFT. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. 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Andy Jassy, CEO, Amazon

CNBC

Consumer-facing artificial intelligence-powered applications have taken the market by storm, but Amazon (AMZN) is opting to concentrate its early efforts on developers and companies using its cloud.