Amazon (NASDAQ: AMZN) has long been a labour-intensive business, despite also spending heavily for many years on automation and robotics. It certainly seems to have got a lot right: over the past five years, the Amazon share price has moved up by 52%.
Since its 1997 listing, it is up a phenomenal 255,978%.
Over the long term, it reportedly plans to replace hundreds of thousands of human roles with robots. It announced this week that it is cutting thousands of corporate roles as AI takes root inside its business.
In many ways, Amazon is leading the AI charge.
It has deployed over 1m robots. Indeed, it is the world’s largest manufacturer and operator of mobile robotics.
Internal efficiencies, external sales growth opportunities
Not only do AI and robotics promise dramatic change inside Amazon, they also offer a massive external business opportunity for it.
After all, AWS (formerly Amazon Web Services) is a huge internet host that has seen demand soar due to AI. In its most recently reported quarter, AWS sales grew 18% year on year to $31bn.
AI is now central to Amazon’s existing business, not just its plans. As the firm’s CEO said in its most recent quarterly results, “Our AI progress across the board continues to improve our customer experiences, speed of innovation, operational efficiency and business growth”.
Lagging AI peers’ share price gains
But wait, if AI is such a big part of the Amazon investment case now, why has its share price not done better in recent years?
A 52% gain in the past five years may sound strong, but the wider S&P 500 is up more than twice as much during that period.
Other perceived AI winners have seen much stronger share price gains: Nvidia has soared 1,558%, Meta Platforms 185%, and Microsoft 166%, for example.
I see at least one clear reason that can help explain the disparity. I think it may be useful as I continue to hunt for shares to buy not only in AI but more broadly.
The conglomerate discount
Nvidia is crystal clear about what its business is. Microsoft and Meta have tentacles in multiple areas, but both still have a fairly understandable focus.
What about Amazon?
It runs an airline and sells books. It operates an online sales platform and owns Whole Foods Market. It offers web hosting services and builds robotics.
In other words, Amazon has fingers in an awful lot of pies.
It has a clear, strategic business rationale for it all. Those planes help it move around the books it sells, for example.
But seen from another angle, it increasingly looks like a conglomerate – lots of businesses under one roof. As we know from history, conglomerates often trade at a discount to the sum of their parts.
Maybe AWS would attract a higher valuation as a standalone operation than bundled in with all of Amazon’s other interests, for example.
Amazon is one of Wall Street’s biggest AI stories, in reality. It just might not be as obvious as in businesses with a narrower strategic focus, like Nvidia. Accordingly, I do not necessarily see the Amazon share price as indicative of what to expect from AI stocks more generally.
Amazon’s price-to-earnings ratio of 35 is a bit racy for my tastes, so I will not be investing.
