Wall Street Is Rewarding AI Results, Not Just AI Spending

Score one for Andy Jassy and his team at Amazon (AMZN). After months of AMZN stock underperforming the S&P 500 ($SPX) on fears that the company was spending too much, too fast on its artificial intelligence (AI) buildout, the CEO put those fears to rest with the latest earnings report. The release made one thing clear: Amazon’s AI strategy is paying off in a big way.

Amazon's second-quarter report recorded the fastest growth in Amazon Web Services (AWS) in 18 quarters, with the segment exceeding an annual run rate of $25 billion in AI revenue thanks to new agreements signed with several big companies, including Warner Bros. Discovery (WBD), Pinterest (PINS), Snowflake (SNOW), and Moody’s (MCO). Amazon also recorded a $25 billion annual run rate for its chips business, which includes its custom-built Trainium AI chip. Amazon has commitments from AI startups Anthropic and OpenAI, Uber Technologies (UBER), Pinterest, and numerous smaller startups.

But here’s the thing that perhaps impresses the most — investors rewarded AMZN stock even though Jassy announced that Amazon is increasing its projected capital expenditures this year from $200 billion to $220 billion. Fellow hyperscaler Alphabet (GOOGL) made a similar declaration earlier in the earnings cycle by announcing a jump in capex to $200 billion. Investors disapproved then, sending Alphabet stock down.

But Amazon? Its stock jumped 15% the day after the Q2 report, proving that the market is okay with spending on AI as long as companies prove they can be successful. Amazon hit that mark with room to spare.

Amazon Beats on Earnings

Amazon's earnings report was solid across the board. Revenue came in at a whopping $200.6 billion, up 20% from a year ago. North America sales increased 16% year-over-year (YOY) to $116.2 billion, while International segment sales increased 15% YOY to $42.2 billion.

But the big gains were in AWS, which is the largest cloud computing business in the world by market share. AWS sales also climbed to $42.2 billion, up 37% YOY, while AWS operating income was strong at $16.6 billion.

AWS typically provides the best profit margin among Amazon’s segments, and that held true in Q2. That’s one of the reasons why analysts watch AWS growth so closely — the company actually gets the majority of its profits from Amazon Web Services.

But that doesn’t even tell the full story. Amazon also recorded a huge $53.39 billion windfall as non-operating income, which the company attributed largely to its investment in Anthropic. That allowed net income to soar to $62.64 billion — up from $18.16 billion a year ago — and EPS jump to $5.82 per share. 

On the Q2 earnings call, Jassy told analysts that the higher cost of memory and storage for data centers is pushing Amazon’s capex estimate from $200 billion to $220 billion. But even then, he said the demand for AI computing power and data centers will continue to grow.

“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," Jassy said. "In fact, the demand we already have for 2028 is striking. Remember, enterprises are still very early in using inference at scale in their current production applications. We long believed AWS could become a few hundred billion-dollar revenue business and now believe it'll be at least double that, and very possibly be a trillion-dollar annual revenue business for us in time, with very appealing accompanying free cash flow and return on invested capital.”

What Do Analysts Expect for Amazon Stock?

Analysts are nearly unanimous on AMZN stock with a consensus “Strong Buy" rating. Out of 57 analysts with coverage, 49 have a “Strong Buy” rating, five have a “Moderate Buy,” and three have a “Hold” rating.

The sentiment since Amazon’s Q2 earnings report has been overwhelmingly positive. Goldman Sachs analyst Eric Sheridan increased his price target from $335 to $375 after earnings, indicating potential upside of 38% from current levels. Benchmark analyst Daniel Kurnos was even more bullish with a $400 price target, suggesting possible upside of 47% from here.

Clearly, analysts and investors alike are willing to support massive AI spending when they can see the results of that spending paying off. Amazon is proving its investments translate into real momentum for AWS.