Morgan Stanley's Amazon earnings verdict has a blind spot

Vuk Zdinjak

Sat, August 1, 2026 at 11:46 PM GMT+3 6 min read

Amazon (AMZN) stock closed the July 31 trading session up 15.32% at $271.58, as it soared following the release of its second quarter (Q2) 2026 earnings report on July 30.

The stock is up 17.66% year-to-date as of Saturday morning, August 1. Meanwhile, the SPDR S&P 500 index (SPY) is up about 9.55% in the same period.

On a superficial level, the earnings look great, but during the artificial intelligence (AI) boom, reading the fine print is more important than ever, as is understanding the larger picture.

In a research note shared with me, Morgan Stanley analyst Brian Nowak and his team are bullish on Amazon stock and have lifted their price target to $335 from $330, reiterating an overweight (buy) rating based on a 25x multiple.

Amazon reported revenue of $200.6 billion, up 20% year over year.Daniel Mainye/Unsplash

Key facts from Amazon's Q2 earnings report

Amazon reported revenue of $200.6 billion, up 20% year over year (YoY). Net income increased 243.95% YoY to $62.6 billion.

Unfortunately, the impressive net income growth comes with a caveat. As the company noted, Q2 2026 net income includes non-operating pre-tax other income of $53.4 billion, primarily from its investments in Anthropic.

That means Amazon's investment in Anthropic, which is a private company, has grown in theoretical value since the investment. The problem is that it is not on the stock market, and the valuation may or may not be of practical value, as we will see later.

During the earnings call, Amazon CEO Andy Jassy addressed growing capital expenditures (CapEx):

"We now believe we will spend approximately $220 billion in cash CapEx in 2026. The higher cost of memory [is] pushing this number up from our prior estimate of about $200 billion. Even at that amount, we will still not have enough capacity to meet all the demand we have in 2026, and I believe this dynamic will also be true in 2027, too."

High CapEx is already negatively impacting Amazon's free cash flow, and increased CapEx isn't desirable. Free cash flow in Q2 2026 hit a negative $7.6 billion. We need to remember that it was still positive in Q1 at $1.2 billion and reached $18.2 billion in Q2 2025.

Along with high CapEx, Amazon has thrown a lot of money into Anthropic's competitor OpenAI.

Amazon's Form 10-Q says:

"Subsequent to June 30, 2026, we invested the remaining $21.3 billion Commitment Amount in shares of Series C Preferred Stock of OpenAI."

According to the Financial Times, this final tranche was finalized in the last week of July.

Amazon provided guidance for Q3:

Net revenue in the range of $197 billion to $202 billion
Operating income in the range of $22.5 billion to $26.5 billion

Morgan Stanley believes that AWS's Rule of 70 demonstrates GenAI ROIC

Nowak said that AWS's rule of 70 demonstrates the return on invested capital (ROIC) for generative AI (GenAI).

What Nowak is saying here is that AWS hit 70 using the rule of 40.

The Rule of 40 means the annual revenue growth rate plus the profit margin equals 40% or more.

He continued by saying that AWS's approximately 840 bp growth acceleration to 36.8% YoY growth "speaks to its pole position in the age of GenAI adoption in training and inference."

Analysts raised their 2027 EPS estimates by 2%, and AWS's 2027 revenue by 2% to 41% YoY growth.

The team also raised their 2027 and 2028 CapEx estimates to $325 billion and $350 billion, respectively.

Analysts noted that AWS's $496 billion backlog was 5%, or approximately $20 billion better than expected, adding that this represents an important signal of multi-year growth to come at AWS.

Analysts noted Amazon's downside risks:

Investments step up and continue for longer than expected
Merch margins worse than expected
AWS revenue decelerates and/or margins decline

The team also shared its bear case, along with the base case. The bear case estimates a price target of $215.00.

What do other analysts think, and how does Morgan Stanley's opinion compare

According to MarketBeat, 56 of the 59 analysts covering Amazon stock rate it a buy. Three give a hold rating. The average price target is $322.12.

Morgan Stanley's Amazon price target misses the bigger picture

The core of Morgan Stanley's thesis is AWS growth, and the fact that they raised their growth estimates and believe it will continue to grow rapidly for a long time is very strange.

The thesis ignores the fact that there are two main drivers of this growth: OpenAI and Anthropic, both unprofitable companies funded by Amazon.

Furthermore, the thesis ignores the potential and very likely entry of a new competitor into the hyperscaler space.

Bloomberg recently reported that Meta (META) is developing a plan to enter the cloud infrastructure business and to sell its excess AI capacity.

While Meta still hasn't launched such a business yet, Mark Zuckerberg, the company's CEO, commented on it during the Q2 earnings call: "We're getting a lot of offers for compute at a significant premium over what we paid for it."

If we read between the lines, it sounds as if Meta could rapidly overtake the market by selling it at a lower premium. A potential price war would drive AWS's profit margins lower and nullify the "rule of 70".

In addition to the emerging competitor, understanding the OpenAI/Anthropic situation is of paramount importance.

Private valuations for OpenAI and Anthropic make them look like great investments. The problem is that credit markets disagree.

SoftBank has been trying to get a $10 billion loan, with its OpenAI shares as collateral, for a few months now. Bloomberg reported that it tried to get the loan by reducing the amount to $6 billion, but the talks still stalled.

While SoftBank can't even secure a $10 billion loan, the actual amount of money it needs to finance its project is much larger.

The Wall Street Journal reported that Nvidia is in talks to provide a roughly $250 billion backstop for OpenAI's data-center project. The data center will be built by SoftBank Energy.

The issue here is that both Anthropic and OpenAI need more money and more capacity. This is leading to higher and higher CapEx, and more investments, and possibly interventions like this one from Nvidia.

There is a limit to how much debt can be raised to keep this going, and profitability doesn't seem to be in sight.

This story was originally published by TheStreet on Aug 1, 2026, where it first appeared in the Investing section. Add TheStreet as a Preferred Source by clicking here.