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Written by Geoffrey Seiler for The Motley Fool->
Amazon has a big opportunity with its cloud computing and chip businesses.
Meanwhile, the company's e-commerce business is underappreciated.
The goal of many investors is to beat the market, which is typically represented by the S&P 500 index. To do that, you need to find stocks that will outperform the S&P 500.
One stock I think is well positioned to do that this year is Amazon (NASDAQ: AMZN). The stock has been a laggard the past few years but has recently started to regain its momentum. Let's look at the reasons why the stock looks poised to be an outperformer this year.
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One of the big knocks on Amazon has been that its two big cloud computing competitors, Microsoft and Alphabet, have seen much faster cloud revenue growth. This is true, but Amazon has the larger base, and now revenue at Amazon Web Services (AWS) is starting to accelerate.
The company demonstrated that once again in the first quarter when AWS revenue climbed 28% to $37.6 billion. It was its fastest growth in nearly four years (15 quarters) and a nice step up from the 24% growth it produced in Q4 and the 20% growth it saw in Q3.
With partnerships locked up with Anthropic and more recently OpenAI, and the company set to spend $200 billion on capital expenditures (capex) this year to add capacity to meet surging demand, expect AWS growth to continue to accelerate throughout the year.
Data center spending is set to continue to soar in the coming year, and as a result, artificial intelligence (AI) infrastructure stocks are among the hottest on Wall Street. While Amazon's chip business has often been overlooked in the past, it is now suddenly getting a lot more investor attention.
The company recently said its chips business was a $20 billion annual run-rate business and would be around $50 billion when taking into account internal usage. While its internal usage doesn't count toward sales, it helps give it more bang for its buck when it comes to its capex compute spending and helps save it billions of dollars on inference costs.
Meanwhile, it built an entire data center dedicated to Anthropic using its Trainium chips. Amazon is starting to see solid momentum with its chips, and investors are starting to give the company credit for the cost advantage this business gives it.
In addition, Amazon also has a very large custom central processing unit (CPU) business with its Graviton chip. With CPUs looking like the next big AI infrastructure bottleneck due to the rise of agentic AI, Amazon is in a good position to benefit from this trend as well.
With CPU to graphics processing unit (GPU) ratios moving from a 1:8 ratio to a 1:1 ratio due to the rise of agentic AI, Amazon is well positioned on the hardware front to benefit from agentic AI. It is also in good shape on the platform side, especially after teaming up with OpenAI on its Amazon BedRock Managed Agents platform that lets customers build AI agents using OpenAI foundational models within AWS.
The company is also positioning its e-commerce site to be a leading platform for agentic commerce. It's developed its own agentic commerce protocol -- model context protocol (MCP) – to help AI agents interact with retail systems for pricing, inventory, and fulfillment. It also has tools to allow AI to act on behalf of customers when buying.
While AWS gets much of the press nowadays, Amazon's e-commerce business continues to hum along with solid sales growth. What is most impressive and underappreciated with its e-commerce operations, though, is that Amazon is driving huge efficiency gains through the use of robotics and AI, which is leading to huge operating leverage where profitability growth greatly outpaces revenue growth.
If investors ever catch on that Amazon is one of the world's great robotics companies, watch out. Meanwhile, opening up its logistics network adds another growth driver to this business.
Amazon has a lot of great things going on, yet the stock is attractively valued both from a historical perspective and relative to its brick-and-mortar peers Walmart and Costco, which both trade at over 40 times forward price-to-earnings (P/Es) ratios. Trading at only a forward P/E of 32 times, Amazon has a lot of room to continue to run this year through both growth and multiple expansion, which sets it up to outperform the S&P 500 in 2026.
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Geoffrey Seiler has positions in Alphabet and Amazon. The Motley Fool has positions in and recommends Alphabet, Amazon, Costco Wholesale, Microsoft, and Walmart. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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