Amazon grew inventory by 30%, but a huge bet on AI might not restore 27% growth

Amazon has pioneered extremely important new industries.

However, that happened before founder and CEO Jeff Bezos stepped down as CEO in July 2021. Amazon’s contributions include selling everything from books to streaming video online and transforming its IT systems into a new industry: cloud services.

While Amazon Web Services continues to dominate the sector, its growth has been slower than Microsoft’s Azure. What has set the two apart is Microsoft’s generative AI strategy – with a $13 billion bet on OpenAI – maker of ChatGPT.

Azure Could Overtake AWS By 2026, February Study Finds Forbes Since then, Amazon announced a generative AI strategy in April, noted Yahoo financeand last month shared a plan to invest more than $100 billion in data centers by 2034, the Wall Street Journal.

Can CEO Andy Jassy turn generative AI into Amazon’s third breakthrough innovation? If this is the case, can the e-commerce giant restore the average annual growth of 27.4% in turnover achieved between 2010 and 2020?

Here are three reasons why ambition might be out of reach:

• Outside of AI chips, revenue opportunities for generative AI are low.
• Amazon is catching up with a formidable rival in generative AI cloud services and software.
• Unless the company’s generative AI strategy wins Amazon a significant share of a large and rapidly growing market, significantly faster growth of its generative AI strategies could be elusive.

I have contacted Amazon for comment and will update this post if I receive a response.

Amazon’s Generative AI Strategy

Strategy defines a set of coherent choices about how an organization intends to achieve its objectives. A generative AI strategy would set specific revenue goals over time and make clear choices on the dimensions needed to achieve those goals, such as:

• Target customers. Which customer groups in which geographies will the company serve?
• Some products. What products or services will the company provide to these customer groups?
• Approach to product development. Will the company develop these products internally, through partnership or through acquisition?
• Pricing. Will the company offer a good product at the lowest price or the best product at a high price?
• Critical activities. How will the company design, build, deliver, market, sell and service its products?

Amazon’s generative AI strategy is vague on some of these dimensions and clearer on others.

• Generative AI revenue goals. Although Amazon has articulated a broad vision, the company has not outlined specific generative AI revenue goals. “The magnitude of the societal and commercial benefits of the solutions that will be possible will amaze us all,” Jassy wrote in an April letter to shareholders, according to Yahoo! Finance“We are optimistic that much of this world-changing AI will be built on AWS.”
• Target customers. Amazon aims to satisfy “the generative AI needs of enterprise and consumer customers,” Jassy noted, according to Yahoo finance.
• Some products. Amazon has ““All the pieces are in place to be the go-to technology company for both customer groups,” Jassy noted in the shareholder letter. Amazon strives to meet customer needs by being the everything store for generative AI hardware and software, I noted in my book Brain rush. Amazon’s offerings include Graviton processors, Trainium large language model training chips, Inferentia LLM inference chips, the Rufus chatbot for Amazon’s marketplace, and Amazon Q, “which writes and debugs code for AWS users,” noted Yahoo! Finance. The “next-gen” Alexa being shown to the press in September 2023 is excluded from Amazon’s generative AI products. “The new Alexa is reportedly far from ready for prime time – due to insufficient training data, inadequate access to training materials, and other obstacles,” noted TechCrunch.
• Approach to product delivery. “Customers don’t just want one model,” Jassy wrote in his letter. “They want access to different models and sizes of models for different types of applications.” To that end, Amazon provides its generative AI products through partnerships and internal developments. For example, Amazon offers LLMs through partnerships with Anthropic — in which the company has invested $4 billion — Stability AI, Mistral, Meta, Cohere, and Amazon’s own models, Jassy noted. Amazon plans to invest $230 million in startups building generative AI applications, according to TechCrunch.
• Pricing. I couldn’t find any information on whether Amazon would seek to offer good products at the lowest price or the best products at a higher price.
• Critical activities. AWS data centers will be the critical delivery mechanism for Amazon’s generative AI strategy. Amazon’s more than $100 billion investment in cloud computing and AI infrastructure over the next decade will outpace “its sprawling network of e-commerce warehouses,” according to the report. Newspaper reported.

To be sure, Amazon could be much clearer in its internal communications than in its public communications. For investors, the biggest uncertainty is how much revenue Amazon hopes to make from generative AI.

Because of the intensive computing resources required to train and operate LLMs, “Amazon expects tens of billions of dollars in revenue from AI over the next few years,” the Newspaper note.

To put that in perspective, AWS generated $90 billion in revenue, or about 16% of Amazon’s total revenue in 2023, which was $575 billion. With Amazon’s total revenue growing 12% in 2023, an additional $10 billion in AWS revenue would have added just two percentage points to the company’s growth rate in 2023.

AWS rivalry with Microsoft Azure

AWS maintains a lead in the cloud services market, but Microsoft’s Azure is growing faster and slowly closing in on AWS’s lead.

In Q4 2023, Microsoft Azure grew faster than AWS, raising the prospect of Azure overtaking AWS as the cloud services industry leader by 2026, according to my February 2024 report. Forbes job.

AWS is growing much slower than Microsoft’s Azure cloud infrastructure unit. In the fourth quarter of 2023, AWS lost two percentage points of market share to 31%, while Azure gained two percentage points to 24%, according to CRN.

During the last quarter of 2023, AWS grew by 13% while Azure revenue increased by 30%, it noted. CNBC.

If these trends continue, Azure, which was growing faster thanks to the fallout from Microsoft’s estimated $13 billion investment in OpenAI, was poised to surpass AWS.

Certainly, AWS grew faster in the first quarter of 2024, reducing its growth disadvantage by three percentage points. However, Azure has maintained its growth. Specifically, AWS revenue grew 17% in the first quarter, according to CNBCcompared to Azure’s 31% growth during the quarter, CRN note.

In the first quarter of 2024, AWS maintained its 31% share of the cloud services market while Microsoft’s Azure gained a percentage point to 25% of the market, according to Statist.

Will Amazon’s Generative AI Strategy Restore 27.7% Revenue Growth?

Amazon stock outperformed Microsoft in the first half of 2024. Specifically, Amazon shares rose 30%, representing a market cap of $2.07 trillion. In contrast, Microsoft’s stock rose 22% to a market cap of $3.4 trillion during the period, according to Google Finance.

Microsoft’s stock performance lagged despite growing faster and more profitably than Amazon in the first quarter. The software giant’s revenue increased by 17% with a net margin of 35.5%. Amazon’s revenue grew 12.5% ​​in the first quarter with a relatively low net margin of 7.3%, Google Finance note.

Will Generative AI Help Amazon Grow Faster? Jassy told analysts in late April that AWS had already achieved a “multi-billion dollar” revenue run rate related to artificial intelligence, he noted. Investors’ daily life.

Amazon, which named former sales and marketing executive Matt Garman as head of AWS on June 3, has the right products but has been weaker on marketing. “I think Jassy’s goal over the next year will be to catch up with Microsoft in the generative AI race, at least in investor perception,” said CFRA analyst Arun Sundaram. IBD.

“That’s how I see the stock building on its gains,” he added.

Amazon’s stock could have more upside than Microsoft’s. Based on 42 analysts offering 12-month price targets, Amazon stock could rise 13.7% to the average of $221.70, noted TipRanks. The 35 analysts offering 12-month price targets for Microsoft see an 11% upside from the average target of $500.71, TipRankswrote.