Artificial Intelligence: The Next Frontier in Digital Platforms

In the ever-evolving landscape of digital platforms, artificial intelligence (AI) is poised to take center stage. Analysts at Raymond James suggest that Amazon.com and Facebook-owner Meta Platforms are well-positioned to lead this technological revolution, surpassing Google-parent Alphabet.

Raymond James analyst, Josh Beck, has bestowed Strong Buy ratings upon both Amazon and Meta. While he retains a positive outlook on Alphabet, he exercises caution due to concerns about how generative AI will impact the economics of its core search business.

Beck envisions AI as an embedded operating system that will permeate almost every aspect of digital consumer and business platforms. From enhancing office productivity to refining vacation planning, AI will play a pivotal role. Beck predicts that generative AI software revenue could reach approximately $100 billion within a couple of years, with the potential to surge to $300 billion in the next five years.

In this grand AI-driven future, Amazon emerges as a clear winner. Thanks to its cloud-computing business, Amazon Web Services, and its comprehensive range of services catered to companies in need of access to generative AI tools and hardware. Although Beck does not foresee generative AI making a substantial impact on Amazon's revenue in 2024, he anticipates that it will contribute an aggregate of $10 billion in annual recurring revenue in the coming years.

Beck commences coverage of Amazon's stock with an enthusiastic Strong Buy rating and a target price of $185. This valuation is based on a multiple of 12.5 times the 2025 estimates for enterprise value-to-earnings before interest, taxes, depreciation, and amortization multiple.

Amazon's Strong Performance

In early trading on Wednesday, Amazon's shares showed a positive trend as they increased by 0.8% to $154.89. The company is evidently making significant strides in the market.

Meta's AI Integration

According to Beck's analysis, Meta (formerly known as Facebook) is expected to excel, primarily due to its internal integration of AI tools rather than offering them to external customers. By applying AI to content recommendations, Meta can enhance engagement across its platforms, including Facebook, Instagram, and WhatsApp. This development has the potential to considerably boost advertising budgets and result in sustained share gains.

Beck, in a comprehensive evaluation, stated, "We anticipate that the current high level of AI investment will gradually decrease in the coming years, leading to improved incremental margins and an attractive valuation." With such promising prospects, Beck initiated a Strong Buy rating on Meta stock with a target price of $425, based on an EV-to-Ebitda multiple of 11.1 times for 2025. On Wednesday, Meta shares showed a slight increase of 0.3% and were valued at $351.29.

Alphabet's Search Economics

While not considered an AI underperformer, Alphabet (the parent company of Google) still has some ground to cover regarding the impact on search economics. Beck suggests that Google's cost of answering queries may rise, prompting the company to demonstrate it has a top-notch AI model in order to sustain or expand its dominant share of the search market. This will be a crucial aspect for Alphabet moving forward.

Beck's coverage of Alphabet stock includes an Outperform rating and a target price of $150. As of Wednesday, Alphabet shares experienced a noteworthy increase of 2.4% and were valued at $139.86.