oscargarcia updated the narrative for AMZN

OpenAI signs a 7-year, $38 billion cloud computing partnership with Amazon Web Services.

Here’s a breakdown of the recent deal between Amazon.com, Inc. (AMZN) and OpenAI—and how it could influence Amazon’s valuation.

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What’s the deal

• OpenAI and Amazon Web Services (AWS) announced a $38 billion multi-year cloud infrastructure agreement (reported as a seven-year deal) under which OpenAI will use AWS’s infrastructure—hundreds of thousands of NVIDIA GPUs and large CPU clusters—to train and run its AI workloads. 

• Amazon’s announcement: “multi-year strategic partnership … Under this new $38 B agreement … OpenAI will immediately start utilising AWS compute … all capacity targeted to be deployed before the end of 2026, with the ability to expand further into 2027 and beyond.” 

• The market reacted: Amazon stock jumped ~4-5% after the announcement. 

• Strategic significance:

• It signals AWS is competitive for large-scale frontier AI infrastructure, not just standard cloud clients. 

• It helps mitigate the risk that Amazon was falling behind in the “AI cloud” arms race (versus Microsoft Azure, Google Cloud). 

• It gives OpenAI more cloud vendor diversification (previously, Microsoft was its big partner), which changes the dynamics of cloud infrastructure partnerships. 

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How this affects Amazon’s valuation

Here are the channels by which this deal can influence Amazon’s financial profile, and hence, its valuation. I’ll also highlight the risks and caveats.

Positive implications

1. Revenue upside for AWS:

• If OpenAI uses AWS at scale, Amazon could earn a high-magnitude revenue stream over the years from this contract.

• It boosts investor confidence in AWS’s long‐term growth and margin potential (higher margin business than retail).

• Given Amazon’s market cap is currently around US $2.7 trillion according to several data sources. 

• A large contract helps signal “AI cloud = growth engine” rather than just e-commerce.

2. Margin improvement potential:

• AWS historically has higher margins than Amazon’s retail business. If AWS scale increases, the margin contribution to Amazon overall could improve.

• Re-rating possible: investors may assign a higher multiple (P/E) to Amazon as its profile shifts more towards high-growth, high-margin AI infrastructure.

3. Strategic positioning & moat:

• Amazon gets a larger stake in the frontier of AI infrastructure. This can create knock-on benefits: custom chips, data-centres expansions, edge infrastructure, etc.

• The deal may help Amazon attract other large AI workloads, thereby reinforcing its cloud ecosystem.

4. Positive sentiment and “optionalities”:

• The market often rewards companies that capture “AI upside” even if near-term profits are modest. The deal is headline-grabbing, underlining Amazon’s AI exposure.

• It enhances optionality: if AI growth is hyper-growth, Amazon is better positioned.

Risks and caveats

1. Recognition & timing:

• A $38 billion commitment is large, but the revenue will be over many years—roll-out through 2026/2027 and beyond. So immediate earnings uptick is limited.

• Amazon may need to invest heavily (capex, data-centres, custom chips) to service the contract. That could weigh on margins before benefits fully flow.

2. Dependency on AI growth materialising:

• Valuation gains are predicated on the assumption that AI workloads will keep scaling and generate strong demand. If the AI boom slows or becomes more competitive, margin outcomes may disappoint.

• One commentary warns of “circular financing” in AI infrastructure (investments fueling more infrastructure and growth expectations). 

3. Competitive & execution risks:

• Other cloud providers (Microsoft, Google) remain strong. Amazon must execute well to deliver the promised scale, performance, and cost-efficiency.

• Execution failures, delays, or cost overruns could undermine the value of the deal.

4. Valuation already large:

• Amazon is already a mega-cap with a valuation in the multi-trillion USD range. Incremental deal value must be substantial to move the needle significantly on multiples.

• According to Yahoo/FI data, Amazon’s trailing P/E is around ~30–35× (depending on source) for its existing business. 

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My take on valuation impact

Putting it all together:

• The deal materially improves Amazon’s long-term growth story, especially for AWS.

• It likely justifies a premium or re‐rating of Amazon relative to a pure retail story.

• However, the near-term profit boost is limited; the key will be execution and seeing how much revenue/margin Amazon captures in the next 1-3 years.

• If I were modelling it: Suppose this contract adds incremental free cash flow (FCF) of, say, US$2–4 billion in 3-5 years (hypothetical), that would justify a small tick in the valuation multiple given the $2.7 trillion market cap baseline.

• The bigger effect might be risk-premium reduction: the market may view Amazon as less “risky” (falling behind in AI) and thus assign a higher multiple (e.g., move from 30× forward earnings to 32–35×) – that multiple effect on a large base is significant.

• But if the AI infrastructure market becomes highly commoditised, or costs escalate, Amazon could face margin pressure rather than a boost.

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Rough numeric illustration

Let’s make a back‐of‐the‐envelope:

• Current market cap ~ US$2.7 trillion.

• Suppose this deal enhances Amazon’s forward annual free cash flow by US$4 billion in 3-5 years.

• If we apply a discount rate and assume a 20× multiple on that incremental FCF (conservatively), that adds ~$80 billion to value (~3% increase in market cap).

• If the deal also boosts overall margin/earnings such that forward earnings rise by say $10 billion and the market gives the stock a 2-point higher P/E on existing earnings (say from 30× to 32× on earnings of ~$90 billion), that multiple tick might add ~US$180 billion (~6–7% uplift).

• Combined, one might think this deal could justify a 5–10% incremental valuation upside if execution plays out.

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Conclusion

The $38 billion AWS–OpenAI deal is a significant strategic win for Amazon, strengthening its AI infrastructure credentials and potentially boosting long-term growth and margins for AWS. For valuation: yes, it is a positive catalyst, likely supporting a premium re-rating or derisking of the business. But it’s not a guarantee of a major short-term jump: the benefits will accrue over years, and they depend heavily on execution and the broader AI market trajectory. Given Amazon’s already large valuation, incremental upside might be solid (5-10 %), but not game-changing unless something much bigger emerges.

Given the latest financial results and this deal with OpenAI, I'm raising my valuation to $275.