Ever ISI analyst Mark Mahaney identifies Amazon as the most undervalued artificial intelligence investment for 2027 and beyond, setting a price target of $355. This valuation stands in contrast to the stock's current trading level of approximately $250, reflecting a view that the market is underappreciating the company's potential to shift from an AI laggard to a winner. While stocks like Nvidia and Palantir Technologies have driven the S&P 500 index higher, Amazon shares have risen 51% over the last five years, lagging behind the index's 88% gain during the same period.
The core of Mahaney's thesis rests on Amazon Web Services (AWS), the world's leading cloud infrastructure provider. Although Amazon has opted not to develop its own AI model, AWS aims to remain the primary data center, IT layer, and platform for training and deploying AI services. This strategy is already yielding results, with AWS revenue accelerating to $42.2 billion last quarter, a 37% year-over-year increase. The growing backlog and significant capital investment in new data centers suggest this compounding growth will continue.
Beyond the cloud division, AI is being integrated across Amazon's e-commerce, retail, and services operations. The company is applying AI search tools to help customers navigate ordering choices and using AI to assist brands in creating and targeting sponsored advertisements. Furthermore, automation and AI are being layered into the supply chain, including warehouse sorting, self-driving delivery, and drone delivery. While drone delivery is a longer-term investment, these initiatives are expected to drive efficiency gains.
Amazon's North America retail business generated $116 billion in revenue last quarter, marking a 16% increase. Margins for this segment remain thin at 7.4% over the last 12 months, largely due to ongoing investments in automation and AI. However, the analysis projects that operating leverage across the supply chain will lead to margin expansion over time.
Mahaney's valuation model factors in AWS's annualized revenue rate (ARR) of $169 billion. If this figure grows by another 37% over the next 12 months, it would reach $232 billion. With a profit margin of roughly 35%, this equates to approximately $81 billion in operating earnings for AWS. The remainder of Amazon's business, including its international segment, currently generates $627 billion in revenue. Mahaney estimates this could grow to around $800 billion over the next two to three years.
Assuming a 10% consolidated margin on that projected $800 billion in non-AWS revenue would yield $80 billion in earnings. Combined with AWS earnings, this results in total earnings of $161 billion. Based on these figures, Amazon's current forward earnings multiple is just 17, suggesting the stock is undervalued for investors holding for the next few years or longer.