Amazon shares: overpriced or a possible bargain?

Could now be a smart moment to consider Amazon (NASDAQ: AMZN) shares? Leading tech firms have been pouring vast sums into AI. The long-term cost-benefit analysis for that remains unclear. Only time will tell. One of the big spenders on AI has been Amazon.

Its stock price fall of 7% so far this year partly reflects cooling investor enthusiasm for the AI narrative as the sums being spent have soared. But Amazon has a proven track record of rapid growth and smart strategic choices.

The bear case: Amazonâs overvalued

At the moment, the stock sells for 30 times earnings.

As tech shares go, that may not seem too wild. But personally I think it is a high valuation and I would rarely consider buying a share with that price-to-earnings ratio.

AI could help its online marketplace business, for example by reducing the need for manpower. We have already seen large-scale job cuts announced at the firm this year, with AI likely expected to pick up much of the slack.

But AI could weaken rather than strengthen the marketplace business, if it makes it easier for shoppers to find what they want without going through Amazon.

A firm using AI in the right way might be able to connect retailers, delivery firms and customers without the decades of investment in infrastructure that this retail giant has made.

That online retail business, anyway, increasingly looks like its past crown jewel more than its future. It remains large. But the current heavy spending on AI is not just to beef up the data centres its AWS hosting business runs, but also to develop chips.

Amazon is a growing force in the chip space. That is a costly business to be in when it comes to research and development. Given how uncertain the medium- to long-term outlook for AI chip demand remains, there is a risk that Amazonâs huge investment in this area will end up being a poor use of money.

The bull case: doubling down on success

The thing is, the company does have a lot of money to play with. In its most recent quarter alone, net income topped $21bn.

Its online retail platform is massive, giving it structural advantages like economies of scale and an increasingly powerful advertising platform. Its success helps feed further success that way â and that could keep increasing as it expands even further.

Meanwhile, the AWS and chip business is performing strongly when it comes to revenue growth. AWS sales last year grew by a fifth. The chips business is more than doubling in size annually.

While Amazon has been spending heavily on AI, that could pay back in bucketloads over the long term.

Iâm temptedâ¦

On balance, I am far more bullish than bearish about Amazonâs business prospects.

I also do not think its current valuation is crazy from a long-term perspective, even though it is higher than I normally go for.

On balance, then, I think now is a good moment to consider the shares.

The post Amazon shares: overpriced or a possible bargain? appeared first on The Motley Fool UK.

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C Ruane 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.