As global economic turmoil continues, stock market turmoil does, too. Not even e-commerce and cloud computing infrastructure pioneer Amazon (NASDAQ: AMZN) has been exempt. Its shares fell following an otherwise glowing Q3 2023 earnings report as many investors zeroed in on "sluggish" growth in its cloud business segment, Amazon Web Services (AWS).
Nevertheless, since artificial intelligence promises to be a top investment theme for the foreseeable future, Amazon recently announced a deal with top AI start-up Anthropic. Specifically, Anthropic will use and help improve Amazon's in-house custom-designed AI chips. Here's what investors need to know.
Claude answers GPT with a new chip deal
Amazon announced its latest tie-up with Anthropic in mid-October, just ahead of the Q3 earnings update. Amazon has said it will invest $1.25 billion in the AI unicorn (a start-up that has a valuation of at least $1 billion) and could expand that investment to $4 billion.
This pales in comparison to Microsoft's (NASDAQ: MSFT)$10 billion investment in ChatGPT developer OpenAI early in 2023, but the deal has one notable difference: Not only will Anthropic use Amazon AWS as its primary cloud infrastructure provider, much like OpenAI taps Microsoft Azure, but Anthropic will also use and help develop future iterations of Amazon's Trainium and Inferentia chips.
Amazon CEO Andy Jassy talked up the deal on the Q3 earnings call, reminding investors of Amazon's years-long work developing Trainium and Inferentia AI chips. These, along with other chips used within the AWS cloud ecosystem, are the result of Amazon's acquisition of semiconductor design start-up Annapurna Labs in 2015. Anthropic has committed to using these chips with its AI model and conversational chatbot, Claude, as well as other AI models it's developing.
In return, AWS is making Anthropic's AI models available to its own customers as part of its Bedrock generative AI subscription service.
- Amazon has said Inferentia (used in AI inference, the computing done once an AI model has been put in service and generates responses to users' queries) is saving customers money with its efficient use of power.
- It sounds as if Trainium (used in training the AI model with massive amounts of data, tasks that Nvidia's AI systems excel at) is less widely deployed although Amazon says it has been using the chips to train simpler AI models for use on its own e-commerce platform.
Amazon's win could also be Google's win
Although some observers once feared Amazon was falling behind the other tech giants in the sudden onset of the generative AI race, its recent deals seem to ensure AWS will remain on the cutting edge. That's important. Though AWS revenue growth fell to just a 12% year-over-year pace in Q2 and Q3 this year (while Microsoft Azure and Alphabet's Google Cloud both grew in the 20%-plus range), it's still far and away in the lead in cloud infrastructure. Revenue came in at a whopping $92 billion annualized run rate at the end of September 2023 and generated an impressive 30% operating profit margin.
Nevertheless, there is some added corporate intrigue with Amazon's investment in Anthropic as it tries to go toe to toe with Microsoft and OpenAI. That's because Google, which has already been in a battle for generative AI attention with OpenAI, has also invested in Anthropic multiple times. Google participated in a $450 million funding round this past spring, and after Amazon's latest October deal, rumors surfaced that Google would invest up to an additional $2 billion in Anthropic.
This is because Anthropic has some catching up to do as it trains new AI models its cloud customers can use and customize. And training those models (again, primarily with Nvidia hardware) costs a lot of money. It looks as if the cash burning a hole in Anthropic's pockets will be heading to Amazon's and Nvidia's coffers, but Google's investment in Anthropic means it gets a cut in the equity upside if Anthropic is ultimately successful.
All of this might sound confusing, but the main takeaway here is that the big tech companies are betting heavily on this newest type of AI and dividing up future market share among themselves (however large or small the generative AI market might be in a decade's time). Everyone wants a piece of the action.
But Amazon's weapon could wind up being those chips it's been working on, and getting a new co-developer in Anthropic could give it a jump-start in its endeavors on the infrastructure underlying the cloud and AI. Google could share that advantage in this arms race, too, since it has been developing AI chips in conjunction with Broadcom for some time.
At any rate, Amazon stock looks like a good long-term bet as the AI battle keeps heating up.
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Suzanne 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. Nicholas Rossolillo and his clients have positions in Alphabet, Amazon, Broadcom, and Nvidia. The Motley Fool has positions in and recommends Alphabet, Amazon, Microsoft, and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.