Key Points
Amazon’s AI chip business would have an annual revenue run rate of $50 billion if it sold to external customers.
The company’s AI chips provide a key competitive advantage to AWS.
Amazon appears likely to go head-to-head with Nvidia in the future.
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Amazon (NASDAQ: AMZN) has a massive business that many investors probably haven’t considered. CEO Andy Jassy wrote in his recent letter to shareholders, “Our chips business is on fire, changes the economics for AWS, and will be much larger than most think.”
I suspect this business is already larger than most think. Jassy revealed that Amazon’s custom AI chips business is growing at a triple-digit rate and has a $20 billion annual revenue run rate. More strikingly, he claimed that if the unit were a stand-alone business and sold AI chips to AWS and other external customers, its annual revenue run rate would be around $50 billion.
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Amazon hasn’t previously disclosed details about just how successful its AI chips are. Now that the company has revealed this “hidden” $50 billion business, is it the buy signal investors need?
Image source: Getty Images.
Challenging Nvidia
Nvidia (NASDAQ: NVDA) remains the undisputed heavyweight champion in the AI chip market. However, could that title be in jeopardy? Jassy seems to think so. He noted, “Virtually all AI thus far has been done on Nvidia chips, but a new shift has started.”
Jassy acknowledged that AWS has “a strong partnership” with Nvidia. He said that AWS will continue to support Nvidia’s GPUs. But he also argued that “customers want better price-performance.” And that’s what Amazon is giving them.
For example, the company’s Trainium2 chips achieved a 30% price-performance improvement over similar GPUs. Trainium3 began shipping earlier this year and has a 30% to 40% higher price-performance than Trainium2. Amazon is still about 18 months away from making its Trainium4 chips widely available. However, Jassy said that “a significant chunk” of the new AI chip has already been reserved.
The success of these AI chips is clearly great news for AWS. Jassy stated that the Trainium product line will save the cloud services unit “tens of billions of capex dollars per year and provide several hundred basis points of operating margin advantage versus relying on others’ chips for inference.” The more cost-effective AWS is, the more customers it will attract and retain.
Will Amazon go head-to-head against Nvidia and market its Trainium chips to external customers? It seems likely, based on Jassy’s comments. He wrote in his annual shareholder letter, “There’s so much demand for our chips that it’s quite possible we’ll sell racks of them to third parties in the future.” I predict that Amazon will become one of Nvidia’s top competitors over time.
What about the $200 billion capex that scared investors?
Amazon’s stock floundered in February and March in large part because investors were scared by the company’s plan to spend a staggering $200 billion on capital expenditures this year. Most of this total is targeted toward AI infrastructure expansion.
Does this massive spending make the good news about the AI chip business that Jassy discussed irrelevant? I don’t think so. Neither does Jassy. He compared the overall AI opportunity to a land rush. Jassy explained that his philosophy is, “When you identify disproportionate inflections, bet big.” AI is one of those inflations.
Jassy argued that no technology has experienced a faster rate of adoption than AI. He pointed to AWS’ AI-related momentum but said that the unit “could be growing even faster.” The two biggest constraints are power and GPUs. Both require significant funding to address.
Importantly, Jassy stated that Amazon isn’t investing such an enormous amount of money in capex this year “on a hunch.” AWS expects to monetize much of its 2026 capex in 2027 and 2028. Jassy noted that the cloud unit already has “customer commitments for a substantial portion” of the planned capital expenditures.
A buy signal
Let’s return to the original question: Is Amazon’s $50 billion AI chip business a buy signal for investors? My answer is a resounding “yes.”
Amazon isn’t just an e-commerce stock. It’s more than a cloud stock. It appears to be on the verge of becoming a GPU stock.
I liked how Jassy framed the opportunity: “We’re not going to be conservative in how we play this–we’re investing to be the meaningful leader, and our future business, operating income, and FCF [free cash flow] will be much larger because of it.” I strongly suspect that he’s right. And if he is, buying Amazon stock right now should pay off handsomely over the next decade and beyond.
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Keith Speights has positions in Amazon. The Motley Fool has positions in and recommends Amazon and Nvidia. The Motley Fool has a disclosure policy.