Generative AI has been a prominent investment opportunity over the last few quarters. While some believe that artificial intelligence (AI) is a bubble, and draw parallels with the dot-com boom and bust of the late '90s, many others see the transition as a real revolution in tech.

There could be some pockets of overenthusiasm, as the word “AI” is being used with a literal frenzy in recent earnings calls. While some companies will realize revenues from their AI initiatives in coming years – if they're able to at all –  others are already booking revenues, as well as fat profits.

While Nvidia (NVDA) will, of course, be the first name that might come to mind when thinking of a company that has milked AI, Amazon (AMZN) is also reaping the benefits, and during the Q1 earnings call earlier this week, it said that the business had hit a “multi-billion dollar” revenue run rate. Could AI be the next big thing for Amazon? We’ll discuss in this article, beginning with a snapshot of the company’s Q1 earnings.

Amazon Reports Better-Than-Expected Q1 Earnings

Amazon’s Q1 earnings were better than expected – both on the top line as well as the bottom line. Looking at some of the key metrics, revenues of enterprise-focused Amazon Web Services (AWS) rose 17% YoY and easily surpassed the 12% growth that analysts were expecting. It was the second consecutive quarter when the segment’s revenue growth expanded, after hitting an all-time low of 12% in Q3 2023.

The e-commerce giant's profitability exploded in Q1, thanks to the aggressive cost cuts – and its operating income more than tripled to $15.3 billion. Its free cash flows also surged, and the trailing 12-month free cash flows adjusted for equipment lease finance were $48.8 billion.

Amazon shares rose after the report, and could have rallied even more if not for the soft guidance; its Q2 revenue growth forecast of 7%-11% fell short of the 12% that analysts were expecting.

AWS Could See Better Days Ahead, Thanks to AI

AWS has been the proverbial cash cow for Amazon, and Q1 was no different. The segment accounted for nearly two-thirds of its operating profits, with a revenue share of just above one-sixth.

The company is quite upbeat on the outlook for AWS, and during the earnings call, CEO Andy Jassy said, “Companies have largely completed the lion's share of their cost optimization and turned their attention to newer initiatives.” He added, “AWS customers are also quite excited about leveraging GenAI to change the customer experiences and businesses.”

Jassy said that “tens of thousands” of customers are using Bedrock – its cloud-based AI service. He expects the customer spending on GenAI could last for the next 2 decades.

How Amazon Is Benefiting from AI

While AWS is benefiting from the growing adoption of AI, other Amazon segments are also reaping the rewards. During the earnings call, AMZN talked about a new feature where sellers on the platform only need to provide the URL to their website and it will create a product detail page on Amazon using AI.

There are other business functions, like logistics and the consumer-facing ecommerce interface, where Amazon will benefit from AI. While the company is already using technology to improve how customers shop on the website, it can come up with even better recommendations through GenAI features.

The company is also using AI to help advertisers make their ads more engaging and, in the process, more effective. Amazon’s advertising revenues rose 24% YoY in Q1 and reached $11.8 billion. The business might see even better days ahead, as Amazon has launched an ad-supported tier for Prime. Going by Netflix’s (NFLX) example, Amazon’s ad revenues should receive a boost from the ad-supported Prime tier.

AMZN Stock Forecast: The Best Is Yet to Come

Amazon was already the top pick for many brokerages heading into the Q1 confessional, and analysts turned even more bullish on the shares following the earnings report, as many raised their target price.

Amazon has a mean target price of $210.09, which is 13.7% higher than yesterday’s closing prices. Its Street-high target price of $245 - via Citi, which raised its target by $10 following the Q1 report – is 32.6% higher than current price levels.

Overall, I believe the best is yet to come for Amazon, and while the company is scaling up its capex on AI, these investments will pay off well in the coming years. The stock trades at reasonable valuations, and still looks like a buy despite its 21.5% rally in 2024, as AI drives the next leg of growth for the tech giant.