Nvidia was the best-performing stock in the S&P 500 last year. Its share price surged 239% as artificial intelligence (AI) whipped Wall Street into a frenzy.

However, several hedge fund billionaires began diversifying away from Nvidia in the fourth quarter, while purchasing shares of Amazon(NASDAQ: AMZN).

• Louis Bacon of Moore Capital Management sold 873,000 shares of Nvidia, reducing his stake by 99%. He simultaneously increased his stake in Amazon by more than 1,000%, such that it now ranks as his third-largest position.

• Israel Englander of Millennium Management sold 1.7 million shares of Nvidia, reducing his stake by 45%. He simultaneously increased his stake in Amazon by 1%, such that it now ranks as his fourth-largest position (excluding options).

• Steven Cohen of Point72 Asset Management sold 1.1 million shares of Nvidia, reducing his stake by 66%. He simultaneously increased his stake in Amazon by 11%, such that it now ranks as his largest position (excluding options).

The trades made by Englander and Cohen are especially noteworthy because they run two of the most successful hedge funds in history. Specifically, as of December 2023, Millennium Management ranked No. 2 and Point72 Asset Management ranked No. 13 in terms of net gains since inception, according to LCH Investments.

However, investors should not interpret their trades to mean Nvidia is a bad investment. None of the fund managers completely closed their positions in the AI chipmaker, but rather reduced their stakes and reallocated capital to other AI stocks, including Amazon.

Amazon has a strong presence in three markets

Amazon has three important growth engines: e-commerce, digital advertising, and cloud computing. Specifically, Amazon operates the largest online marketplace in North America and Western Europe as measured by sales, but the company is still gaining market share. Morgan Stanley analysts expect Amazon to surpass Alibaba and lead the world in retail e-commerce sales by 2027.

Strength in retail has naturally led Amazon to dominate the retail advertising market, so much so that it ranks as the third-largest adtech company in the world, behind Alphabet's Google and Meta Platforms. However, Amazon is taking market share more quickly than Meta, and Google is actually losing ground, according to eMarketer.

Finally, Amazon Web Services (AWS) still dominates the market for cloud infrastructure and platform services, despite losing 2 points of market share to second-place Microsoft Azure in the fourth quarter. That means Amazon is uniquely positioned to benefit as businesses adopt cloud infrastructure to support artificial intelligence (AI) projects.

Amazon is using artificial intelligence to strengthen its market presence

Like many leaders, Amazon CEO Andy Jassy sees artificial intelligence (especially generative AI) as a game-changing technology. "Generative AI may be the largest technology transformation since the cloud (which, itself, is still in the early stages), and perhaps since the internet," he wrote in his latest shareholder letter.

Naturally, Amazon is using artificial intelligence to strengthen its competitive position across its three primary business segments.

• E-commerce: In February, Amazon debuted a generative AI shopping assistant called Rufus. It was initially made available to a subset of U.S. consumers via the Amazon mobile app, but Rufus is now rolling out to a wider audience. Think of Rufus as an assistant that answers questions and makes recommendations based on the Amazon product catalog, customer reviews, and information across the web. Additionally, Amazon is also using machine learning models to optimize warehouse inventory and last-mile delivery, both of which make its logistics business more efficient.
• Digital advertising: Amazon recently introduced a generative AI tool that lets brands create relevant and engaging lifestyle images featuring their products, which ultimately helps them run more cost-effective advertising campaigns. Notably, among media buyers that struggle to create successful campaigns, 75% cite generating creative content as their biggest challenge. Amazon solves that pain point with its new AI-powered image generator.
• Cloud computing: Amazon Web Services ranked third behind OpenAI and Microsoft in generative AI market share last year, but product development at every layer of the AI stack could help it gain ground. At the infrastructure layer, custom chips for AI training and inference offer a cheaper alternative to Nvidia GPUs. At the platform layer, Bedrock lets businesses build custom generative AI applications. And at the application layer, Amazon Q automates tasks for nontechnical workers and software developers.

Investors should watch AWS closely. Amazon is projected to gain market share in e-commerce and digital advertising, but Microsoft has quickly become a formidable competitor in the cloud, due in part to its exclusive partnership with OpenAI.

Amazon is a good stock to buy right now

Straits Research says online retail sales will increase at 8% annually through 2030. Meanwhile, Grand View Research believes digital advertising and cloud computing sales will increase at annual rates of 15% and 14%, respectively. Finally, Bloomberg expects generative AI spending to compound at 48% annually during the same period.

Collectively, that gives Amazon a good shot at double-digit revenue growth through the end of the decade. Indeed, Wall Street expects the company to grow sales at 11% annually over the next five years. In that context, its current valuation of 3.3 times sales look reasonable. Patient investors should feel comfortable taking a small stake in Amazon today.

Should you invest $1,000 in Amazon right now?

Before you buy stock in Amazon, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Amazon wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than tripled the return of S&P 500 since 2002*.

See the 10 stocks

*Stock Advisor returns as of April 22, 2024

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Trevor Jennewine has positions in Amazon and Nvidia. The Motley Fool has positions in and recommends Alphabet, Amazon, Meta Platforms, Microsoft, and Nvidia. The Motley Fool recommends Alibaba Group and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.