In the era of generative AI, has Amazon Web Services (AWS) fallen behind?

Amazon's stock price has risen nearly 50% since the beginning of the year, significantly outperforming the market benchmark. This mainly reflects the company's proactive efforts in cost reduction and efficiency improvement. However, compared to companies like Microsoft, Google, and Meta, Amazon's progress in the field of large language models is not particularly remarkable. The market has doubts about its AI capabilities and concerns about potential drag on Amazon in the future.

CITIC Securities believes that Amazon has accumulated long-term experience in the field of AI, from early smart speakers to the current Titan model. It also leads the world in self-developed capabilities in software and hardware stacks and has established deep cooperation with open-source platforms like Hugging Face, aiming to build a more open AI ecosystem.

As enterprise customers continue to increase their investment in AI, Amazon's solid foundational capabilities and relatively open ecosystem are expected to continue to benefit. Amazon's current global leadership position is also expected to continue.

Amazon's current EV/EBITDA (2023E) multiple of 16x is significantly lower than the historical median (20x), making the short-term risk-reward ratio quite favorable. We remain optimistic about the company's growth opportunities in cloud computing business under the generative AI trend.

CITIC Securities believes that Amazon, relying on its early model reserves and comprehensive software and hardware stack capabilities, is expected to continue to benefit from the growth of generative AI. In the medium to short term, the company's retail business is entering a seasonally improving channel, and Amazon's revenue growth is also expected to bottom out in the second quarter of 2023.

On the cost side, the achievements of cost reduction and efficiency improvement have begun to show. Factors such as logistics and energy that previously suppressed the company's profits are expected to gradually ease. We maintain our profit forecast for the company. The current stock price has already fully reflected the current macro disturbances. We recommend paying attention to investment opportunities brought by inflation easing, quarterly improvement in company performance, and AI empowerment.

Specific Analysis

Current market concerns:

1. Whether Amazon has a significant gap in algorithms compared to closed-source model vendors like Microsoft and Google;

2. Whether Amazon can support its own AI business needs in terms of computing power and whether it has the ability to support external enterprise AI capabilities;

3. The advantages and competitiveness of Amazon's software and hardware stack related to AI.

What Amazon possesses:

1. Model capabilities: Amazon has the research and development capabilities of large language models and is committed to building a more open AI ecosystem;

2. Hardware stack: Self-developed chips and hardware covering key aspects such as training and inference;

3. Software stack: Overall strength at the industry's forefront, covering data preparation, model construction and training, deployment and inference, and other aspects.

Looking ahead, Amazon's reserves in terms of algorithm, computing infrastructure, and software stack demonstrate its continued strong AI capabilities. The subsequent empowerment of AI on Amazon is expected to be driven by the continued growth of open-source models and the increase in user demand for inference, among other factors. Currently, Hugging Face's daily visits exceed tens of millions, and Amazon, as its preferred cloud platform, demonstrates the enormous potential of the open-source ecosystem. At the same time, the proportion of traditional enterprise customers on Amazon continues to rise, and the growth in computational power demand from traditional enterprises is also expected to drive the growth of Amazon's cloud business.