One artificial intelligence (AI) stock you’d be smart to stumble upon this month

One artificial intelligence (AI) stock you’d be smart to stumble upon this month

Over the past two weeks, investors have been getting their quarterly downloads on portfolio companies as earnings season fully unfolds. As usual, big tech companies have received a fair amount of scrutiny due to investors’ curiosity and expectations around AI. to Microsoft, the alphabetAnd Amazon (Amzn 2.10%) In particular, the cloud business has been at the center of management discussions.

The three giants gave investors reasons to cheer. Microsoft’s cloud computing platform, Azure, stole the show again and helped give the stock some life. Furthermore, Alphabet continues to make steady progress in its private cloud business, while also working to re-accelerate growth in its core advertising business as it fends off competition from TikTok and Instagram.

But as the holiday season approaches, one of these “7 Hot” stocks looks even more enticing. Although the prospects for Amazon’s cloud unit look more optimistic than ever, I see other reasons to buy the stock. After taking a closer look at its e-commerce and advertising results, I think now might be a great opportunity to buy some stock in Amazon and hold it for the long term.

Don’t sleep on the advertising business

One of the lesser-known sectors of Amazon’s ecosystem is its advertising business. Typically, when people think of Amazon, they likely think of the company’s e-commerce storefront or its cloud network, Amazon Web Services (AWS). But what if I told you that in the company’s most recent quarter, ending September 30, advertising services was Amazon’s fastest-growing segment?

During the third quarter, Amazon reported advertising revenue of $12.1 billion, an increase of 26% year over year. In comparison, Alphabet’s ad revenue rose 9% year over year during the third quarter, while Alphabet’s ad revenue rose 9% year over year during the third quarter. Meta platforms“Grew by 23%.

During the earnings call, Amazon CEO Andy Jassy told investors that the company is investing heavily in machine learning when it comes to advertising. By doing this, Amazon is better able to target specific ads to specific demographics at the right time. Another way Amazon disrupts advertising is by leveraging external channels. For example, the company works closely with the social media platform Pinterest To increase its online surface area – by using a photo sharing site to promote products as a third party.

Jassy expressed his positive outlook and the potential depth of Amazon advertising when he said, “I think we haven’t even scratched the surface in terms of knowing how to intelligently integrate advertising into video, audio, and into grocery.”

Given the company’s ability to expand its advertising business across its various product categories like Internet of Things (IoT) or grocery, this is reason enough to get excited. But with the holiday shopping season just around the corner, the crossover between Amazon’s advertising and its core e-commerce platform could help fuel more growth sooner than investors realize.

A person standing outside holding a cup of coffee and a smartphone.

Image source: Getty Images.

Holidays are coming

Online stores are Amazon’s largest source of revenue by far, accounting for 40% of total revenue in the third quarter. Not surprisingly, the fourth quarter was a big one for the e-commerce giant as shoppers geared up for the holidays. During the fourth quarter of 2022, Amazon reported $64 billion in revenue in its e-commerce business, representing just 2% year-over-year growth.

With that in mind, I counter that the company’s growth this year could be much better. To begin with, the Fed has been doing its best to fight inflation. While the current inflation rate of 3.7% is still above the Fed’s long-term target of 2%, I think Jassy summed it up perfectly when he said: “Even in a more difficult economy, there will be a lot of e-commerce.” buying”.

Given the progress Amazon is making with targeted advertising, along with its position as a leading e-commerce platform, I think the fourth quarter will see some more pronounced growth compared to previous years. If so, the stock could significantly underperform Amazon’s year-end results, making now an interesting time to consider buying.

Should you invest in Amazon stock?

The chart below shows Amazon’s free P/E cash flow compared to its seven greats from Microsoft, Alphabet, and apple, NvidiaAnd meta platforms Tesla.

AMZN price to free cash flow chart
Free AMZN price to cash flow data by YCharts.

Investors can see that over the past year, Amazon’s valuation has fallen the most within this group on a free cash flow basis. Naturally, this should be taken with a pinch of salt, as the stock has been trading at a very high valuation for some time. In a sense, the stock’s high valuation in the past was justified, and the company rewarded market confidence by posting two consecutive quarters of positive free cash flow that brought the stock’s FCF rating back in line with historical levels.

To me, this is a clear sign regarding the company’s ability to reward its shareholders, and there is no reason to believe that Amazon will fail to deliver again in the future. Although 2022 and the first quarters of 2023 were tough, the company quickly turned things around.

In other words, the above chart also shows that the market has not yet caught on to the company’s progress, and may be seeking more predictable growth. For long-term investors looking to take advantage of some lower pricing action, I would buy Amazon at these levels. With some on Wall Street calling for a new rise in interest rates Standard & Poor’s 500Amazon appears poised to boom.

Susan Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Adam Spatacco holds positions at Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, Pinterest, and Tesla. The Motley Fool has a disclosure policy.

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