AWS Growth and ROIC Support Raising AMZN Target Price to $335

Overview

This report is a Morgan Stanley company research update on Amazon.com Inc. It argues that AWS delivered accelerating revenue growth, a sharp increase in margins, and improved backlog in 2Q26, strengthening market confidence in its ROIC in the GenAI era; although retail was broadly in line with expectations, positive signals from fulfillment efficiency, robotics, grocery/perishables, and agentic shopping are accumulating.

Core views

The core view is that AWS remains well positioned for expanding GenAI training and inference demand. AWS 2Q26 revenue grew 36.8% year over year, AI ARR increased by approximately $10bn sequentially to $25bn, and non-AI revenue also accelerated to the low-20% range; meanwhile, AWS backlog reached $496bn, up $132bn sequentially and approximately $20bn above expectations. The report believes this demonstrates strong sustainability of AWS's growth over the coming years and supports higher capital expenditure investment.

Analysis framework

The report analyzes 2Q26 results, comparisons among AWS, Google Cloud, and Azure as hyperscalers, segment revenue and EBIT, capital expenditure assumptions, EPS revisions, and relative valuation. The $335 target price is based on approximately 25x average 2027/2028 EPS of approximately $14, rolled forward to midyear, while also referencing a PEG discount to peers.

Methodology notes

• Valuation FrameworkP/E multiple

  P/E-based target price method

  The report applies an approximately 25x P/E multiple to average 2027/2028 EPS of approximately $14, rolls it forward to midyear, and arrives at a $335 target price.

• Relative ValuationPEG comparison

  PEG discount comparison

  The report states that the $335 target price implies approximately 0.7x PEG, still representing an approximately 50% discount to the hyperscaler peer median of approximately 1.3x.

• Operating QualityRule of 70 / ROIC framework

  Assessing cloud business returns based on combined growth and margin

  The report uses AWS revenue growth, EBIT margin, and incremental margin together to assess ROIC potential during the GenAI cycle, and believes hyperscalers could achieve 30%-70%+ incremental margins in the inference era.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Amazon.com Inc (AMZN.US)

  Covered asset

  Strengths

  Accelerating AWS growth, expanding AI ARR, a strong backlog, and high cloud business margins; improving retail fulfillment efficiency, robotics, grocery/perishables, and agentic commerce; advertising and Prime provide sources of high-margin growth.

  Weaknesses

  Capital expenditures have been raised substantially, putting near-term pressure on free cash flow; North American retail and merchandise margins below expectations partially offset AWS upward revisions.

  Comparison

  Compared with Google Cloud, AWS had slightly lower sequential revenue growth in 2Q26 but greater EBIT growth, which the report views as evidence of earnings quality; relative to hyperscaler peers, AMZN still trades at a meaningful PEG discount.

  Risks

  Investment lasting longer than expected, merchandise margins weaker than expected, AWS revenue growth slowing or margins declining, and retail growth and fulfillment leverage falling short of expectations.

Key data

• Report Date2026-07-31The page displays July 31, 2026 04:36AM GMT.
• RatingOverweightMorgan Stanley maintains its Overweight rating on Amazon.com Inc.
• Target Price$335.00The target price was raised, with the report indicating approximately 30% upside.
• Current Share Price$235.50The report table lists the closing price as of Jul 30, 2026.
• AWS 2Q26 Revenue Growth36.8% y/yAbove the approximately 34% expectation mentioned in the report.
• AWS 2Q26 Revenue$42.232bnData from the hyperscaler revenue comparison table.
• AWS 2Q26 EBIT$16.621bnData from the hyperscaler EBIT comparison table.
• AWS 2Q26 EBIT Margin39.4%The report states that AWS and Google Cloud EBIT margins were approximately 39%/36%, respectively.
• AWS Backlog$496bnUp $132bn sequentially and approximately $20bn above expectations.
• AWS AI ARR$25bnUp approximately $10bn sequentially, representing approximately 15% of total AWS ARR.
• 2027 AWS Revenue Growth Assumption41% y/yThe report raises its 2027 AWS revenue estimate by 2%.
• 2027 AWS EBIT$101bnThe report states that AWS accounts for approximately 60% of total company EBIT.

Impact & implications

The report's investment implications for AMZN are positive: if AWS continues to deliver high revenue growth and high incremental margins during the GenAI inference cycle, while retail efficiency improvements materialize, there remains room for AMZN earnings revisions and valuation re-rating. Higher capital expenditures are interpreted as being supported by strong ROIC rather than merely reflecting cash flow pressure.

Risks

• Higher capital expenditures that persist longer than expected could pressure free cash flow.
• Merchandise margins below expectations.
• AWS revenue growth slowing or margins declining.
• Retail revenue growth weaker than expected, or 1P merchandise margins failing to expand consistently.
• Transportation and fulfillment efficiency improvements falling short of expectations.

What to watch

• Whether AWS revenue growth, AI ARR, and non-AI revenue acceleration persist.
• Changes in AWS backlog and its implications for multiyear revenue visibility.
• Whether AWS EBIT margin and incremental margin remain elevated.
• ROIC realization following higher 2027/2028 capital expenditure assumptions.
• Retail fulfillment cost per unit, robotics deployment, and the continuation of per-unit growth after Prime Day.
• Grocery/perishables customer growth, same-day delivery orders, and Alexa shopping interaction data.