The long-term growth trajectory of Amazon Web Services (AWS) is emerging as a pivotal factor in reassessing the investment case for Amazon.com (NASDAQ: AMZN).

In a research note dated August 16, Morgan Stanley analyst Brian Nowak reaffirmed an "Overweight" rating on Amazon.com (NASDAQ: AMZN), setting a base-case price target of $335, implying roughly 27% upside from the current share price of around $262. Furthermore, if AWS continues to expand along its projected path, the analyst suggests the stock could reach $500 by the end of 2027.

During the company's latest earnings call, management stated: "We have long believed AWS could become a multi-hundred-billion-dollar revenue business, and we now think it can at least double that scale, potentially becoming a trillion-dollar annual revenue business with highly attractive free cash flow and returns on invested capital."

Within this framework, the report highlights that as compute capacity continues to scale, the key variable determining when AWS hits the trillion-dollar revenue mark is the monetization efficiency per incremental watt. AWS currently generates approximately $8 per incremental watt, based on full-year 2026 estimates. Morgan Stanley expects this efficiency to keep improving, driven by product innovation and shifting supply-demand dynamics.

The AWS Path to $1 Trillion: Compute Expansion as the Core Driver

Morgan Stanley's analytical model centers on two pillars: compute capacity expansion and monetization efficiency gains. The report projects that Amazon.com (NASDAQ: AMZN) will add 6 to 8 gigawatts (GW) of compute capacity between 2026 and 2027, followed by roughly 8 GW of annual additions thereafter. This would lift AWS's total compute capacity from approximately 14 GW in 2025 to around 120 GW by 2035.

On this basis, AWS revenue growth hinges on the monetization of that compute. Morgan Stanley estimates that if annualized revenue per incremental watt rises to $12, AWS revenue could surpass $1 trillion by 2035. Should monetization efficiency climb further to $14–$15 per watt, that milestone could be reached as early as 2034.

In the base case—assuming roughly 8 GW of annual capacity additions and monetization efficiency gradually improving to $12 per incremental watt—the firm projects AWS revenue to grow from approximately $176.9 billion in 2026 to about $249.2 billion in 2027, representing year-over-year growth of roughly 41%. This implies that the simultaneous acceleration of compute expansion and per-watt revenue generation will be the primary engine driving AWS toward a trillion-dollar revenue base.

Margin Assumptions: AI Business Could Mirror the Core Cloud Trajectory

On the profitability front, Morgan Stanley cites management's commentary that the margin and return profiles of the AI business are "highly similar, or even slightly ahead," of the early stages of the core cloud business. Based on this, the firm sets a long-term EBIT margin assumption of approximately 30% for AWS.

Under this scenario, if AWS revenue reaches $1 trillion, it would correspond to roughly $300 billion in EBIT. Combined with a reasonable contribution from the retail segment, Morgan Stanley projects that Amazon.com's (NASDAQ: AMZN) total company EBIT could reach approximately $500 billion between 2034 and 2036, implying a compound annual growth rate (CAGR) of around 16% to 20%.

Breaking it down: in the $14-per-watt scenario, AWS EBIT is expected to hit roughly $304 billion by 2034, with total company EBIT around $483 billion, translating to a CAGR of approximately 19%. In the $15-per-watt scenario, AWS EBIT and total company EBIT would be approximately $318 billion and $497 billion, respectively, corresponding to a CAGR of about 20%.

Valuation Reset: Current Price Implies a ~50% Discount to Peers

Morgan Stanley argues that Amazon.com's (NASDAQ: AMZN) current share price does not fully reflect the aforementioned long-term earnings potential. The report notes that discounting the estimated $500 billion in long-term EBIT back to 2028 at a 10% weighted average cost of capital (WACC), and then capitalizing it at an EV/EBIT multiple of roughly 21x, yields an implied share price of around $500 by the end of 2027. This multiple remains about 10% below the peer average of approximately 23x.

From another perspective, Amazon.com's (NASDAQ: AMZN) current valuation implies a multiple of roughly 11x on its projected 2035 EBIT (approximately $265 billion), discounted back to 2028 at a 10% WACC. That compares to an average valuation of around 23x for hyperscale cloud and retail peers—including Alphabet, Microsoft, Meta, Walmart, Costco, and Netflix—representing a discount of about 50%.

Morgan Stanley points out that this valuation gap alone suggests meaningful upside for Amazon.com (NASDAQ: AMZN). The report concludes that faster-than-expected AWS revenue growth, continued margin expansion, and operating leverage from retail growth and improved logistics fulfillment costs could all serve as additional catalysts to unlock further upside.