Amazon's cloud service is going to get a big boost from AI, analyst says

Alex Wong/Getty ImagesAmazon CEO Jeff Bezos, founder of space venture Blue Origin and owner of The Washington Post, participates in an event hosted by the Air Force Association September 19, 2018 in National Harbour, Maryland.
  • Amazon‘s artificial-intelligence capabilities will drive increased AWS cloud sales, says Oppenheimer analyst Jason Helfstein.
  • AI will drive increased margins through higher-end products and also lock-in enterprise customers according to the research note.
  • Watch Amazon trade live.

Amazon Web Services’ cloud business will get a big boost from the firm’s growing artificial-intelligence products, driving both revenues and margins, according to Oppenheimer analyst Jason Helfstein. He raised his price target to $US2,085 – a 16% premium to the current share price of $US1,807 – and maintained his “outperform” rating.

Amazon is increasingly focused on embedding high-margin AI products which enable enhanced productivity and revenue opportunities for cloud customers. The e-commerce giant itself heavily utilises artificial intelligence in targeting product placement and advertising on its own site.

AI can drive AWS revenues and margins as its capabilities are embedded in cloud services according to Helfstein. In addition, competitors will struggle to match Amazon’s research and development investments given its market-leading positions, more than double that of nearest competitor Microsoft, in the quickly growing industry.

AWS, which represents the bulk of Amazon’s operating profits, will grow its margins from 28% in 2018 to more than 33%, above consensus estimates, due to these services according to Helfstein. AWS notched revenue of more than $US25 billion in 2018, growing 45% from the previous year.

Recent initial-public-filing documents have put Amazon’s dominance in the segment as the preferred cloud provider on display. In its IPO filing, Pinterest said it plans to spend more than $US400 million over the next five years while Lyft recently signed a $US300 million commitment to utilise Amazon’s services. Both noted the disruption of Amazon’s cloud network was a key risk for business.

Despite Amazon’s success in employing AI within its core retailing business, the company has had previous stumbles with the technology. Amazon scrapped an AI recruiting tool that showed bias against women. The fault in the tool stemmed from the historical database for resumes being dominated by male candidates. Fixes to the algorithm driving results proved inadequate and the program was dropped in 2017.

Amazon reported revenues for 2018 of $US233 billion, rising more than 30% from 2017, while operating income tripled to $US12.4 billion. The results were propelled by strong gains in the AWS cloud segment, which was responsible for more than half of the company’s operating income while accounting for just over 10% of total revenue.

Amazon was up 1.5% on Monday and 20% so far this year.

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