Three Reasons Amazon Can Soar as it Mashes the AI Accelerator
Two months ago, a single point of failure caused internet outages worldwide...
The problem began with a minor glitch at Amazon Web Services (“AWS”). Two programs tried to update a database at the same time, and the resulting entry was left blank…
The error started small… but it turned into a cascading failure that took down major websites like Snapchat, Netflix, and Zoom, to name a few.
Millions of users were affected in the 15 hours it took Amazon to fix the problem… proving how centralized internet infrastructure is today. The incident showed how AWS is a central pillar of what makes the internet work.
AWS is the world’s biggest cloud computing platform. It provides online vendors with IT services like computing power, storage, servers and more. In simple language, it supplies the infrastructure that websites are built on.
It’s indispensable technology for how we interact with the internet. But when AWS is working, it’s completely invisible…
In fact, many consumers don’t even associate Amazon with cloud services. They think of Amazon as an ecommerce company, even though AWS provides 17% of its revenue.
In truth, Amazon is a platform company. Ecommerce and cloud computing are just some of the services the giant provides... among shipping and logistics, streaming, social media, home security, advertising, healthcare and more.
Amazon is deeply integrated into American life – in ways we often don’t even think about.
But there’s one market where Amazon is struggling to gain a foothold… Artificial Intelligence (“AI”).
Amazon’s AI Struggles
This year, megacap stocks enjoyed massive gains thanks to the AI boom. Chipmaker Nvidia (NVDA) soared 30% so far this year. Another standout is Alphabet (GOOGL)… up about 61% on the year as I write.
But Amazon had a much more muted year – returning just 4% to date in 2025.
Amazon underperformed after being late to the AI starting gun. It debuted its first gen-AI chatbot “Nova” in December 2024, about ten months after Google rolled out Gemini… and more than two years after the release of ChatGPT.
This has put Amazon on the back foot compared to AI rivals Alphabet and Microsoft. But next year could be its time to shine…
After its lackluster 2025, Amazon comes into 2026 with a number of advantages. The stock is cheap, the company’s fundamental business is solid, and it’s getting ready to compete in the AI space.
Let’s examine some of the tailwinds behind Amazon… and see how they could pave the way for a sneak attack in 2026...
1. Amazon’s Investment Cycle Hides Strong Fundamentals
In 2025, Amazon poured more cash into the AI buildout than any other company. Take a look…
Amazon poured $125 billion into AI tech in 2025. That’s more than Meta, Alphabet or Microsoft... And CFO Brian Olsavsky says this amount will increase in 2026.
This spending spree has been an understandable weight on Amazon’s share price. But here’s the thing – investment cycles don’t last forever.
Amazon’s AI spend may continue into next year. It may even continue into the year after that. But at some point, Amazon will shift out of investment mode and into growth mode.
Moreover, Amazon puts its cash to work carefully… and the company has a history of turning these investments into more upside.
We can see it with Amazon’s return on invested capital (ROIC). This metric shows how much value companies are able to create with invested cash.
Amazon has stair-stepped its ROIC higher every quarter for the last two years.
Amazon currently has an ROIC of 17%. That means for every dollar it invests in its business, it makes $1.17. And that margin is growing…
So, there’s a lot of potential value wrapped up in Amazon’s AI spending spree. But the market is indifferent to this investment cycle. It’s still pricing Amazon shares like it’s the start of 2025. Take a look…
Amazon’s race to build AI infrastructure has been met with total indifference. But it’s possible the market is underestimating this company, especially given the quality of Amazon’s underlying business…
In the third quarter, AWS grew revenue by 20% year-over-year. And Amazon’s total revenue was up 12% in the same period.
So, Amazon may be spending to shore up its AI infrastructure, but its fundamentals are strong. Its AI spend will benefit the company into the long term. And again, the market is treating Amazon like it’s been in stasis for twelve months.
It may be much sooner than twelve months before Amazon starts climbing again. That’s because the company has some AI bets that could start to pay off in 2026.
2. Amazon’s AI Bets Are Coming to Fruition
As companies like Alphabet and Nvidia soaked up the AI headlines this year, Amazon made some strong plays of its own. The company is joining the fray at two different levels – the chip level and the infrastructure level. Let’s drill into each to see how Amazon’s AI strategy might play out next year…
- Amazon’s Chip Strategy
In 2026, AI will move to a new frontier…
So far, the AI buildout has been marked by model training. This means teaching AI chatbots using massive amounts of data on expensive chipsets.
But as AI saturates the landscape, the buildout will shift to inference – actual use cases where the model thinks things through.
Training requires different resources than inference. The former is a one-time, resource-heavy workload… while the latter is a much lighter weight, repetitive and long-term process.
Nvidia GPUs have been the poster child for AI training…
But Amazon is well-positioned to profit from the shift to inference. That’s because of its custom-built Inferentia chips.
Nvidia may be the gold standard for AI training, but running inference on its chipsets gets darn expensive. That’s where Amazon has the advantage. Amazon’s Inferentia chips can perform inference at a fraction of the cost of Nvidia’s flagship Blackwell GPUs. Take a look…
Inferentia is simply the better value when it comes to inference. And that could lift Amazon as enterprises continue investing in AI.
But Amazon isn’t just tackling AI through chips. It’s also jumping into the infrastructure race…
- Amazon’s AI Infrastructure Strategy
Amazon partnered with Anthropic to build one of the world’s biggest AI “brains.”
This sprawling, 1,200-acre computer data center is called Project Rainier. It’s dedicated to building and hosting the popular Claude AI model. And with an $11 billion price tag, it’s already up and running…
This is a contrast to many of the big-ticket data centers proposed by Amazon’s rivals, which are still in the planning stages. Anthropic is already using Rainier to train future generations of Claude.
This represents a big leap forward in AWS infrastructure. And importantly, Project Rainier is powered chiefly by Trainium2 chips – an AI chip of Amazon’s own design.
With Trainium and Inferentia chips, Amazon is breaking away from the Nvidia architecture that has characterized the AI buildout so far.
At the same time, Amazon is offering AWS services to other AI majors. Last month, it inked a $38 billion deal with OpenAI for AWS cloud services – showing that AWS will continue to be essential in the next phase of the internet.
But there’s one more reason Amazon is poised for a comeback in 2026. The stock has never been cheaper…
3. Amazon has never been cheaper
Today, market expectations are low for Amazon… and the stock is a bargain as a result.
We can see this discount in a few ways. To do it, we’ll need to find Amazon’s price to earnings (“P/E”) ratio.
The P/E ratio is a way of measuring how expensive a stock is. It lets us see how much an investor must pay per dollar of a company’s earnings. The higher the P/E, the more expensive the stock.
One way to get a sense Amazon’s valuation is by comparing its P/E ratio to its peers in the Magnificent 7 – the other biggest businesses in America. In addition to Amazon, the Mag 7 includes Nvidia, Apple, Alphabet, Meta, Microsoft and Tesla.
To show how Amazon ranks against its peers, I averaged the P/E ratio of every company in the Mag 7 (except for Tesla, which is an outlier).
The results show how Amazon is cheaper than its average peer. Take a look.
Today, Amazon is cheaper than Tesla, Nvidia, Apple and Alphabet. It’s in the bottom half of the Magnificent 7… and its PE ratio is a little below average for the group (excluding Tesla).
There’s a lot of room for Amazon to grow its price to come in line with other hyperscalers…
But maybe you’re of the opinion Amazon shouldn’t be priced like Nvidia, Apple or Alphabet. You might view the company as a glorified retailer…
Still, even among this peer group, Amazon stock is cheap. Take a look how its P/E ratio compares to retailers Walmart and Costco today…
So, Amazon is trading at a discount to Magnificent 7, and a discount to rival retailers. But it’s also cheap compared to its own history…
To see this, we can model Amazon’s P/E ratio over the long term. Take a look…
Today, Amazon is trading near one of its cheapest valuations ever. There’s a lot of value packed into this underestimated company today…
In sum, 2025 might not have been Amazon’s year. But the company has spent the year shoring up its operation and position in the race to deploy AI. The company has many routes to success in 2026… and investors should watch its progress closely.
Regards,
Sean Michael Cummings
Editor’s Note: A former hedge fund manager known for spotting early winners is sounding the alarm once again.
He called Netflix at $7.78 (up 4,200% since), Apple at $0.35 (up 20,000%), and Amazon at a split-adjust $2.41 (up 3,200%).
Now, this renowned investor just released a new list of his favorite AI stocks... and not a single Magnificent 7 name made the cut.
Instead, an AI stock you've likely never heard of just flagged as "near-perfect" in his new investing scoring system.
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