Warren Buffett's Favorite Artificial Intelligence (AI) Stock Is a Screaming Buy

Warren Buffett is one of the best investors of all time. But he's not traditionally known for investing in technology businesses. That's changed in recent years, however, and today some of his biggest positions are technology companies. In fact, he's currently betting billions of dollars on a particular artificial intelligence stock that looks like a screaming buy for investors bullish on artificial intelligence (AI).

This iconic company is an artificial intelligence all-star

Most people don't think of Amazon (NASDAQ: AMZN) as an AI company. But one of its biggest business segments sits at the center of the AI revolution.

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In 2006, Amazon launched a new division: Amazon Web Services, or AWS for short. At first, this division was structured around helping to make its internal e-commerce operation more efficient at scaling. But over time, Amazon realized that other businesses needed the same solutions, especially when it came to scaling cloud computing. Today, AWS controls more than 31% of the cloud computing infrastructure market.

From distributed compute and storage to big data analytics, AWS helps make the internet what it is today. But more recently, cloud computing providers like Amazon cater to a massively growing market: AI and machine learning. Artificial intelligence is largely delivered via models. These are mathematically trained systems fed with data that allow AI platforms to do all the things were rely on it for today, things like recognizing patterns, making predictions, and automating tasks without custom programming. Many AI companies run their own models, though some use open-source models.

These models typically need huge amounts of data for training. To function properly upon launch, they need to access and process even more data. All of this requires huge amount of computing power, much of which is provided by cloud service providers like AWS. As the largest cloud service provider in the world, AWS benefits greatly from the AI industry's rising demand for more cloud resources.

This growth in demand won't stop anytime soon. According to McKinsey & Co., data center capacity could rise at an annual rate of between 19% and 22% from 2023 to 2030. This will require a huge buildout of additional cloud infrastructure. "To avoid a deficit," McKinsey & Co. concludes, "at least twice the data center capacity built since 2000 would have to be built in less than a quarter of the time." As one of the largest, most experienced, and best-funded providers, Amazon has a front-row seat to both maintain and grow its dominant market share.

AMZN Revenue (TTM) data by YCharts

Should you buy Amazon stock for its AI growth potential?

AWS is still a minority of Amazon's total overall business. But due to AI demand, this segment is commanding more attention. In 2024, AWS generated nearly $108 billion in revenue, comprising around 17% of Amazon's total sales. That's up from $91 billion in revenue in 2023, which represented just 15.8% of Amazon's revenue that year.

Just as important is AWS' contribution to Amazon's profitability. This segment is significantly more profitable than others. While it only generated 17% of revenue in 2024, AWS was responsible for 58% of its total operating income that year. So not only is AWS a driving force behind Amazon's top-line growth, but it's also the majority of its operating profits today.

AWS is a tantalizing reason for any investor like Buffett to be interested. His holding company owns around $2.1 billion shares, and owned a stake since 2019. To be sure, Amazon's e-commerce business will still likely be the leading contributor of revenue for several years to come. But the explosion of AI demand could soon turn Amazon into an even bigger AI business. If that happens, there should be plenty of upside versus the company's current position as primarily an e-commerce provider.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.