Morgan Stanley's Amazon Earnings Assessment: A Closer Look at Hidden Risks

SUMMARY: Morgan Stanley’s optimistic outlook on Amazon’s earnings masks underlying risks that investors should consider. While the tech giant's second-quarter earnings showed impressive revenue growth, significant investments in AI and rising capital expenditures could pose challenges ahead. This article delves into the details of Amazon's earnings report, the implications of its investments, and a balanced perspective on future growth.

Introduction: Amazon's Earnings Report Sparks Investor Interest

On July 31, 2026, Amazon (AMZN) witnessed a dramatic surge in its stock price, closing the trading session up by 15.32% at $271.58. This spike followed the release of its second-quarter earnings report for 2026, sparking optimism among investors. Year-to-date, shares of Amazon have gained 17.66%, significantly outperforming the S&P 500 index, which has risen by approximately 9.55% during the same period.

Morgan Stanley, a major player in financial analysis, has taken a notably bullish stance on Amazon, increasing its price target from $330 to $335 and reiterating an overweight rating based on a 25x earnings multiple. However, as the excitement around artificial intelligence (AI) continues to grow, a deeper analysis reveals potential blind spots in this seemingly positive assessment.

Key Highlights from Amazon's Q2 Earnings Report

Amazon's Q2 earnings report presented some impressive numbers that initially capture attention:

• Revenue: $200.6 billion, reflecting a 20% year-over-year (YoY) increase.
• Net Income: An astounding $62.6 billion, which marks a 243.95% YoY increase.

While these figures are compelling, they come with important caveats. A significant portion of this net income—$53.4 billion—is attributed to non-operating pre-tax income from Amazon's investment in Anthropic, an AI company. This value, while impressive on paper, raises questions about its practicality and sustainability since Anthropic remains a private entity, making its valuation uncertain.

Increasing Capital Expenditures: A Growing Concern

During the earnings call, Amazon's CEO, Andy Jassy, provided insight into the company's rising capital expenditures (CapEx). Jassy projected that Amazon's CapEx for 2026 would reach approximately $220 billion, up from an earlier estimate of $200 billion. This increase is primarily driven by higher memory costs, which are critical to Amazon’s operations and growth strategy.

The implications of this elevated CapEx are significant. Amazon reported a negative free cash flow of $7.6 billion for Q2 2026, a stark contrast to the positive free cash flow of $1.2 billion in Q1 and $18.2 billion in Q2 of 2025. This trend suggests that rising expenditures may be outpacing revenue growth, creating potential liquidity challenges for the company.

Investments in AI: Double-Edged Sword

As part of its strategy to capitalize on the booming AI market, Amazon has also made substantial investments in competitors like OpenAI. According to Amazon's Form 10-Q, the company recently invested $21.3 billion in Series C Preferred Stock of OpenAI. While these investments position Amazon strategically in the AI landscape, they also represent a significant financial risk, particularly if these companies do not achieve profitability.

The question remains: can Amazon sustain these investments without affecting its core business? As Amazon continues to funnel resources into AI, it risks increasing its overall debts and expenditures without a clear path to profitability for its investments.

Future Guidance: A Mixed Bag

Looking ahead, Amazon provided guidance for Q3, predicting net revenue in the range of $197 billion to $202 billion and operating income between $22.5 billion and $26.5 billion. While these estimates appear robust, they come with a backdrop of increasing costs and capital requirements, raising concerns about whether Amazon can meet its ambitious targets without compromising its financial stability.

Morgan Stanley’s AWS Focus: The Rule of 70

Morgan Stanley's optimistic outlook heavily relies on the growth of Amazon Web Services (AWS). Analyst Brian Nowak pointed to AWS's "Rule of 70," which suggests that a combination of revenue growth and profit margin should equal at least 40% for a company to sustain high levels of growth. According to Nowak, AWS is achieving this with an impressive 36.8% YoY growth, and they have raised their 2027 EPS estimates by 2% and AWS’s revenue forecast by the same percentage.

However, this analysis may overlook critical external factors that could impact AWS’s continued success.

Emerging Competition: The Threat of New Entrants

While Morgan Stanley’s report emphasizes AWS’s current market position, it fails to consider the emerging threats from established players in the tech sector. Meta (META), for instance, has indicated plans to enter the cloud infrastructure business, aiming to leverage its excess AI capacity. During its Q2 earnings call, CEO Mark Zuckerberg hinted at the potential for selling compute power at competitive rates, which could disrupt the existing pricing models in the cloud services market.

If Meta successfully launches its cloud services, it could initiate a price war, resulting in diminished profit margins for AWS. Such a scenario would contradict Morgan Stanley's bullish projections and could significantly impact AWS’s profitability.

The OpenAI and Anthropic Dilemma: Valuations Under Scrutiny

Another layer of complexity arises from the private valuations of companies like OpenAI and Anthropic. While these investments may appear attractive, they are not without risk. Recent reports indicate that SoftBank, a major investor in OpenAI, has struggled to secure a $10 billion loan despite leveraging its shares as collateral. This situation underscores the difficulty in translating private valuations into tangible financial returns.

Moreover, Nvidia has also been engaged in discussions to provide significant funding for OpenAI's data center projects. If both OpenAI and Anthropic continue to require substantial financial support without achieving profitability, Amazon's investments could become a significant liability rather than a strategic asset.

Analyst Perspectives: A Broader Consensus

According to MarketBeat, 56 of the 59 analysts covering Amazon stock rate it as a buy, with just three offering a hold rating. The average price target stands at $322.12, highlighting a generally positive sentiment towards Amazon despite the emerging risks discussed.

However, Morgan Stanley’s price target of $335 may not fully account for the complexities surrounding Amazon’s investments and the competitive landscape. Their bullish stance primarily hinges on AWS growth, yet the analysis may overlook critical risks that could undermine this trajectory.

Conclusion: Navigating the Complexity of Amazon's Future

While Morgan Stanley's outlook on Amazon's earnings is undeniably optimistic, it is essential for investors to approach the narrative with caution. The impressive revenue and income figures should be weighed against the backdrop of rising capital expenditures, the challenges posed by significant investments in AI, and the potential emergence of new competitors in the cloud market.

As Amazon continues to navigate the complexities of its business model, investors should remain vigilant of both the opportunities and risks that lie ahead. The landscape is evolving rapidly, and what appears to be a bright future for Amazon today could be clouded by unforeseen challenges tomorrow.

In a world increasingly influenced by technological advancements, understanding the full picture—beyond the headline figures—is more crucial than ever for making informed investment decisions.