Market Misreads Amazon and Alphabet's Earnings

Amazon and Alphabet are two of the world's largest companies, but their stock prices might not be as attractive as they seem. Amazon trades at about 22 times earnings and about 30 times forward earnings, while Alphabet trades at about 18 times earnings and about 27 times forward.

The reason for this discrepancy is not that investors expect a decline in profits. Instead, the trailing numbers are skewed by large windfalls from investments in Anthropic and other equity securities. For Amazon, the second-quarter net income included $53.4 billion of pre-tax non-operating income, primarily from its Anthropic investments.

Alphabet's second quarter saw a similar phenomenon, with about $98 billion of other income, mostly unrealized gains on equity securities. These mark-ups on paper are expected to swing the other way if valuations fall.

Beneath these windfalls, both companies' operating engines look strong. Revenue rose 24% at Alphabet and 37% at Amazon's cloud business, AWS. However, their capital spending plans near or above $200 billion this year will likely lead to depreciation in future income statements.