*Amazon is investing in Anthropic to further its generative artificial intelligence efforts, just as the market begins to question the 'AI trade.'

*We view the investment positively for AWS and Amazon's chip efforts.

*Ads are coming to Prime Video in 2024, further growing Amazon's advertising business.

*The Federal Trade Commission is expected to bring a lawsuit against Amazon this week -- details in the suit will determine its merit.

The move lower in Nasdaq has some questioning the "AI trade." Sure, we'll continue to see companies make investments in AI -- with the latest being Amazon (AMZN) , which we'll discuss below -- but for many AI is starting to feel like just the latest buzzword following terms like metaverse, augmented and virtual reality, blockchain, non-fungible tokens.

Consider those once-hot labels and how much people care about them today.

A more sober view about the promises of AI is taking hold. We've seen this pattern before and odds are we will see it again. But we are starting to see applications emerge from Axon (AXON) , McDonald's (MCD) , Coca-Cola (KO) , and others. Our view remains that AI has the potential to drive productivity similar to how the internet did. Just like we were in 1998-1999 with the internet (and no mobile internet at the time), we are in the early stages of AI and we suspect there will be aspects to it we have yet to fathom.

So, let's discuss Amazon and its investment in Anthropic. That company was founded by former members of OpenAI and specializes in developing general AI systems and language models, with a company ethos of responsible AI usage. Amazon has designs on Anthropic to help its efforts in generative AI and will invest up to $4 billion in the company, with an initial investment of $1.25 billion. While that sounds like a large figure, exiting the June-ending quarter, Amazon had $64 billion in cash and equivalents on its balance sheet and generated more than $21 billion in operating cash flow during first half 2023. Typically, the bulk of Amazon's cash is generated in the second half of the year as it includes the holiday shopping season. We've seen Amazon make strategic investments in other companies before and as part of this investment, Amazon will have a minority position in Anthropic.

Thinking about this investment, we see it as Amazon looking to replicate Microsoft's (MSFT) alliance with OpenAI, the group behind ChatGPT, and reassure investors it will not be left behind in AI. As part of Amazon's investment, Anthropic will use Amazon's cloud computing platform and its dedicated AI chips to create its models. Another positive for AWS as well as one that reaffirms the view Nvidia (NVDA) chips aren't the only option for AI companies. We know this already given our position in Marvell (MRVL) , which is a strategic supplier to AWS. We expect to learn more about the rationale behind Amazon's investment and how it will help Amazon remain an industry leader in innovation. For now, we continue to rate AMZN shares a One with a $170 target.

Adding additional layers of support for that price target, the growing consensus view is digital shopping will once again grow far faster than overall holiday shopping this year. There are also rumblings Amazon will look to include ads on Prime Video in 2024 as well as offer a premium ad-free tier. Prime Video users will soon see ads on shows and movies unless they pay an extra $3 per month on top of their regular Prime subscription. So far this year Amazon's high-margin advertising business has been growing at a brisk clip, 22% in the second quarter of 2023, crossing the $10 billion mark. With more than 200 million Prime users, the company should see either a nice step up in its advertising business, its membership fee stream, or both.

As all of the positives unfold for Amazon, we will keep watch on reports the Federal Trade Commission will file an antitrust lawsuit against Amazon this week. We'll know more when the suit is filed, but after the FTC investigation of Amazon for four years, it is expected to go after several of Amazon's business practices, including Prime, for allegedly harming consumers and undermining competition. As consumers, we are inclined to side with Amazon, but we will dig into the lawsuit to better understand the FTC's argument and its prospects.

At the time of publication, AAP was long AMZN, MSFT, MRVL, MCD and AXON.