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The Q2 earnings season is nearly over, and it wasn’t terribly pleasant, especially for Big Tech and artificial intelligence (AI) companies. While Nvidia (NVDA) – which is the flagbearer of the AI trade - has yet to report its earnings, other AI players mostly failed to impress markets.
Both Amazon (AMZN) and Tesla (TSLA), for instance, got crushed after their respective Q2 earnings reports. However, I believe that both of these stocks are strong AI plays that look like a buy after the recent downturn. Also, both of these companies stand to benefit from a likely Fed rate cut next month.
Amazon’s AI Business is Running at Multi-Billion Dollar Run Rate
Amazon fell after its Q2 earnings release, as the company’s Q2 revenues and Q3 guidance came up short of estimates. There were some encouraging signs in the report, though, like continued recovery in enterprise-focused Amazon Web Services (AWS) and healthy cash flows and profits.
Amazon is a multi-faced AI play, and several of its businesses - especially AWS - are benefiting from growing global AI spending. There are other business functions, like logistics and the consumer-facing e-commerce 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.
Earlier this year, Amazon 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. The company is also using AI to help advertisers make their ads more engaging and, in the process, more effective.
Management sees AI as a key growth driver. During the Q2 earnings call, CEO Andy Jassy said, “Our AI business continues to grow dramatically with a multibillion-dollar revenue run rate, despite it being such early days.”
Amazon’s Valuations Look Quite Attractive
While there are concerns over slowing growth in Amazon’s e-commerce growth business, I believe the fears are overblown, and healthy growth in other businesses like advertising and AWS – which happen to be far more profitable – should more than balance the slowdown.
Also, the e-commerce segment’s growth should rebound as inflation gradually comes down and the Fed starts cutting rates – the probability of which is quite high at the next Fed meeting in September.
Finally, at a next 12-month (NTM) price-to-earnings multiple of around 33x, Amazon’s risk-reward looks quite favorable. The company’s continued focus on driving efficiencies will ensure strong bottom-line growth in the coming quarters, despite some sluggishness in top-line growth.
Overall, I believe Amazon stock looks like a good AI stock to buy, given its tepid valuations and growth potential.
Tesla is Positioning Itself as an AI Play
Tesla stock fell over 12% following its Q2 report, and its post-earnings price action was the worst among its “Magnificent 7” peers. Incidentally, Tesla was the only constituent of the elite group to miss bottom-line estimates.
The company has been lowering car prices to spur deliveries, which has taken a toll on not only its margins but that of other electric vehicle (EV) players, who have also had to cut prices. Specifically, Tesla’s automotive gross margin – once the envy of other automakers – fell to a five-year low of 14.6% in Q2, and was well short of the 16.3% that analysts expected.
CEO Elon Musk has blamed the Fed’s rate hikes for the slowdown in EV sales multiple times. While the EV industry’s woes are not solely because of higher interest rates, a Fed rate cut would lead to lower rates on car loans, thereby bringing down the overall cost of ownership.
While Tesla is best known for its electric cars – and is the global market leader in the battery electric vehicle (BEV) segment – it is also an AI play. Notably, Cathie Wood of ARK Invest – who Musk has said has a better understanding than most of Tesla's business – believes the company is the “biggest AI project” globally, and that view is shared by some of the stock's other bulls, like Dan Ives of Wedbush. Amid slowing growth – or rather, degrowth – in the core automotive business, Musk has also been trying to position Tesla as an AI and autonomous driving play.
Tesla Could Benefit from AI in the Long Term
Tesla is working on several AI projects, such as the Dojo supercomputer and Optimus humanoid. Its autonomous driving and the yet-to-be-launched robotaxis are also AI products. Musk sees progress on autonomy as key to Tesla’s valuation, and reiterated his stance quite unequivocally during the Q2 earnings call by saying, “I recommend anyone who doesn't believe that Tesla will solve vehicle autonomy should not hold Tesla stock.”
To be sure, all of Tesla’s AI solutions are long-term drivers, and will not contribute meaningfully to its bottom line anytime soon. There is also a question mark on how much revenue the company can generate from these products, even as Musk – who is known to be quite flamboyant with his claims – believes Optimus alone could add $25 trillion to Tesla’s market cap.
That said, I believe hardware plays like Tesla can benefit from the next round of AI euphoria. With all of the Musk controversies – including the alleged conflict of interest with his privately held companies, like xAI – I find TSLA stock to be one AI play that could reward investors in the long term.
On the date of publication, Mohit Oberoi had a position in: TSLA , NVDA , AMZN . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
