This good news could help to fuel a long-term Amazon share price rally
In a world obsessed with artificial intelligence (AI) progress and big data centre infrastructure, it’s hard to sometimes get a clear picture of which companies are truly innovating. However, news broke last week about a deal struck by Amazon (NASDAQ:AMZN) and Rio Tinto that genuinely impressed me.
As a result, I think it could help to lift the Amazon share price given the implications from here.
The news
Amazon’s Web Services division (AWS) has signed a two-year agreement to buy copper from Rio Tinto, sourced from a mine in Arizona. Using new technology, it produces copper with lower emissions and water use than traditional methods. The copper will be used in Amazon’s data centre and AI infrastructure. After all, copper’s key in elements such as wiring and cooling.
Financial terms and volumes weren’t disclosed, but the deal marks one of the first direct copper supply agreements between a major tech firm and a miner, specifically tied to data centre build-outs.
Why it’s very interesting
To begin with, it’s a smart move because commodity markets (especially copper) have been very volatile. Its demand in industrial uses (including AI) is going through the roof, but supply isn’t keeping pace. Even though the initial agreement will only satisfy a small portion of Amazon’s total copper needs, it shows a desire to protect against supply shortages, especially in foreign countries.
Locking in the deal helps create a competitive advantage. If it strikes similar arrangements for more copper or other raw materials, it could help it to outperform peers who are more exposed to price swings and supply shortages.
In my view, the most significant part of all of this is Amazon’s signal on the confidence in the broader AI build-out. The two-year agreement and integration of AWS data analytics into Rioâs operations imply Amazon expects sustained growth in AI workload demand. It also tells me Amazon’s thinking long-term, and is no one-off arrangement.
How the market could react
The stock closed 0.4% higher on Friday (16 January), and is up 4% over the past year. Looking ahead, I think the news could signal the start of a trend higher in the stock. As mentioned, the actual amount of copper from this specific deal isn’t huge, but the implications are very powerful.
Therefore, I think smart investors will have noted this. It’s no surprise Amazon’s pushing hard on infrastructure capex, with estimates as high as $125bn this year. It’s a major theme, and if the business can continue to strike deals and innovate in this area, I think the share price will increase, based on optimism.
In terms of risks, the race around AI infrastructure’s incredibly competitive. Amazon isn’t the only company investing a huge amount of time and money into getting an advantage here. Therefore, if it can’t prove to be gaining on peers, investors might start to lose faith.
Overall, I think it could be a good stock to consider for investors at the moment.
The post This good news could help to fuel a long-term Amazon share price rally appeared first on The Motley Fool UK.
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Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has recommended Amazon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
