Morgan Stanley: In the era of AI, AWS's trillion-dollar revenue is expected; Amazon.com, Inc. (AMZN.US) is projected to reach $500.

Morgan Stanley has released a report, maintaining an "overweight" rating for Amazon.com, Inc. (AMZN.US) and raising its price target from $330 to $335, which is 28% higher than the latest closing price. However, the focus of this report is not on short-term forecasts but rather on a longer-term valuation scenario. Morgan Stanley analyst Brian Novak noted in the report that if AWS's annual revenue could reach $1 trillion and maintain a profit margin consistent with historical levels for cloud operations, Amazon.com, Inc.'s stock price could hit $500 per share by the end of 2027. This optimistic scenario stems from significant upward revisions in expectations made by Amazon.com, Inc. management during the latest earnings call. For years, Amazon.com, Inc. has claimed that AWS revenue could reach hundreds of billions, but management has now adjusted this figure to $1 trillion. In the report, Novak attempts to address the core question raised by this target: how long will it take for AWS to reach a trillion-dollar scale? If this goal is indeed achieved, what would it mean for Amazon.com, Inc.'s stock price? AWS's trillion-dollar revenue vision: Leading profit margins in the AI era may transform it into a powerful profit engine. The trigger for this report was statements made by Amazon.com, Inc. management during the Q2 earnings call. Amazon.com, Inc. management stated, "We have always believed that AWS could become a business with hundreds of billions in revenue, and now we believe it will at least double and is very likely to ultimately become a business with annual revenue of $1 trillion, accompanied by highly attractive free cash flow and return on invested capital." Management also directly addressed the issue of profit margins: "We have achieved this in the first phase of cloud computing, but at that time, demand accumulated over a longer period, unlike the rapid pace seen in the AI era. However, we see that the profit margins and returns in the AI field are comparable to those at the same development stage as core cloud computingactually, they are slightly ahead." These comments form the foundation of Morgan Stanley's model. Data shows that AWS revenue grew by 37% year-on-year in Q2, marking its fastest growth rate in 18 quarters, and annualized revenue from AI and custom chip operations has increased significantly. If the profit margins in the AI era can indeed stay consistent with historical levels for cloud operations as claimed by Amazon.com, Inc.'s management, then a $1 trillion AWS would become a massive profit engine. Amazon.com, Inc.'s capital expenditures surge to $220 billion, with capacity as a key constraint. Morgan Stanley's report clearly states that the real factor determining when AWS can reach $1 trillion in revenue is not demand. Although demand appears strong, the constraint lies in whether Amazon.com, Inc. can quickly deploy sufficient compute capacity to meet that demand. The report outlines a schedule for capacity expansion: adding 6 gigawatts (GW) this year, 8 GW next year, and then continuing to add 8 GW each subsequent year. Amazon.com, Inc. has raised its capital expenditure guidance for 2026 from $200 billion to $220 billion, with most of the additional capital expenditures allocated to building AI infrastructure. The report acknowledges that the outlook for next year will become unclearany part of the process, including power, construction, servers, or labor, could create bottlenecks. However, Morgan Stanley believes that based on Amazon.com, Inc.'s current execution, the annual expansion pace set by its model is achievable. Revenue per watt will determine the timing: it could take until 2034 to achieve $1 trillion in revenue. Having capacity alone is not enough; the key is how much revenue can be generated per watt of capacity. The report notes that currently, every additional watt of AWS capacity generates about $8 in revenue. This number needs to continue to riseMorgan Stanley anticipates that, driven by higher-value AI workloads and more rational computing pricing, revenue per watt will increase. Under assumptions of a higher monetization rate, the model indicates that AWS could reach $1 trillion in annual revenue as early as 2034; under baseline assumptions, this milestone is expected around 2035. The report expects AWS revenue to maintain strong growth until the end of this decade, gradually slowing down afterward as the base broadens. If AWS profit margins in the AI era remain consistent with those of past cloud operations, then a $1 trillion revenue figure would generate hundreds of billions in operating profit. Combined with its retail business, Amazon.com, Inc. is expected to rank among the worlds most profitable companies. Risks and opportunities coexist: Free cash flow is under pressure, but the long-term logic remains unchanged. AWS is already the world's largest cloud business, growing at its fastest rate in 18 quarters, while the AI infrastructure cycle is still in its early stages. However, risks are also very real. Morgan Stanley issues a warning about pressures on free cash flow in the report: Amazon.com, Inc.'s spending on AI infrastructure is beginning to erode free cash flow. Over the past 12 months leading up to Q2, free cash flow has turned negative as expenditures on property and equipment have surged year-on-year. Other risk factors include: monetization rates not increasing as expected, competitors potentially driving down cloud service prices, and regulatory issues that could delay data center construction. If many favorable trends continue, Amazon.com, Inc. stock will reach $500; if these trends develop in a normal manner, the baseline target price is $335. For investors, the core message conveyed by Morgan Stanley is that regardless of the scenario, Amazon.com, Inc.'s greatest growth opportunity may no longer be selling more online goods but rather the astonishing profit potential that AWS can unleash in the AI era. Massive AI investments begin to pay off as Wall Street analysts go bullish. On July 30, Amazon.com, Inc. released a strong Q2 earnings report, with revenue surpassing $200 billion for the first time, operating profit soaring by 43.2% year-on-year to $27.461 billion, and operating profit margin rising to 13.7%, setting a record since the company went public. More importantly, AWS generated $42.23 billion in revenue, a 36.7% year-on-year increase, far exceeding Wall Street's expectation of 31%, marking the fastest growth in 18 quarters since 2021, and the fifth consecutive quarter of accelerating growth. The enormous AI investments are starting to bear fruit. Following the earnings report, several Wall Street firms raised their price targets for Amazon.com, Inc. Goldman Sachs Group, Inc. may be the most optimistic, believing that the tech giant should undergo a more substantial valuation reassessment. The firm raised its price target for Amazon.com, Inc. from $335 to $375, maintaining a "buy" rating. The acceleration in AWS growth, strong AI demand, and positive momentum in advertising business have all contributed to Amazon.com, Inc.'s improved earnings outlook. Bank of America Corp raised Amazon.com, Inc.'s price target from $310 to $320, maintaining a "buy" rating because the performance of Amazon.com, Inc.'s cloud business easily exceeded market expectations. However, the firm also cautioned that more substantial evidence is needed to prove that Amazon.com, Inc. can effectively convert its massive AI expenditure into strong and sustainable free cash flow. Overall, most Wall Street analysts remain optimistic about Amazon.com, Inc., with a consensus rating of "strong buy" and an average price target of $332.95, which is 27% higher than the current stock price level.