Amazon's AI Bet: $330 Bull Case vs $185 Bear Case

Amazon's second-quarter earnings report was one of its best in history, but scratch beneath the surface and you'll find a more complex picture. The tech giant reported net income of $62.6 billion, with earnings per share (EPS) of $5.75 against $1.68 a year earlier. However, a closer look at the company's release reveals that this success is largely due to a non-operating pre-tax gain of $53.4 billion from its investment in Anthropic.

This means that roughly six-sevenths of the pre-tax gain that tripled headline EPS came from marking up a stake in a private AI company. While not an accounting scandal, this development is crucial for putting a price target on Amazon's stock. Our bull case puts the price at $330, while our bear case puts it at $185.

The free cash flow of Amazon has turned negative, with an outflow of $7.6 billion on a trailing-twelve-month basis. This marks a stark contrast to last year's inflow of $18.2 billion, representing a $25.8 billion swing in just one year. The main culprit behind this decline is Amazon's significant investments in artificial intelligence (AI).

AWS sales soared 37% in the quarter, with segment operating income reaching $16.6 billion. However, this growth comes at a cost, Amazon spent a staggering $54.2 billion on property and equipment in the three months to June.