Amazon's Q2 2026 profit soared on paper, but most of its reported net income came from unrealized gains in private company stock, not from its core business. Investors relying on headline numbers may miss the real risks
Amazon's second-quarter 2026 earnings stunned Wall Street, with the company reporting $5.75 in earnings per share-far above analyst expectations of $1.82. The stock jumped roughly 15% in a single trading session following the announcement, as investors rushed to buy shares on what appeared to be a massive profit beat. But beneath the surface, the headline number was driven by a factor that many investors overlook: unrealized, or "paper," gains from Amazon's investments in other companies.
For individual investors, a company's price-to-earnings (P/E) ratio is a common way to judge whether a stock is cheap or expensive. After Amazon's earnings release, its trailing 12-month P/E ratio remained below the S&P 500 average, making the stock look like a relative bargain. But this apparent value was largely the result of accounting rules that require companies to include unrealized gains from their investment holdings in net income-even if those gains have not been converted to cash.
Paper Gains and Accounting Rules
Unrealized gains, often called paper gains, represent increases in the value of assets a company holds-such as shares in other companies-that have not yet been sold. Under U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), public companies must include these unrealized gains in their income statements each quarter. This means that a company's reported net income can be heavily influenced by changes in the market value of its investments, regardless of whether any shares were actually sold.
In Amazon's case, more than 85% of its reported $62.6 billion in Q2 2026 net income came from unrealized gains, not from selling cloud services or delivering goods. The bulk of these gains were tied to Amazon's stake in Anthropic, a private artificial intelligence company whose estimated valuation rose sharply during the quarter. Despite Anthropic's ongoing operating losses, Amazon was required to recognize the increased value of its investment as income, even though it did not receive any cash from the change.
Risks of Relying on Paper Profits
Investors should be cautious when interpreting earnings that are inflated by paper gains. Amazon's ability to sell its Anthropic shares is limited by contractual restrictions and the fact that Anthropic is not publicly traded, making the investment highly illiquid. If Anthropic's valuation were to fall, or if the company failed, Amazon could be forced to recognize a large paper loss in a future quarter, which would reduce reported earnings just as quickly as they were inflated.
Excluding these unrealized gains, Amazon's Q2 2026 net income would have been just $9.2 billion, or $0.85 per share-a fraction of the headline figure. Using this lower earnings number, Amazon's P/E ratio would jump well above the S&P 500 average, making the stock look far less attractive on a valuation basis. This example highlights how accounting rules can create a disconnect between reported profits and the underlying performance of a company's core business.
Where to Find and How to Adjust for Paper Gains
Unrealized gains are typically disclosed in a company's income statement, often under headings such as "Unrealized gains and losses" or "Other income." Public companies file these statements with the Securities and Exchange Commission (SEC) as part of their quarterly (10-Q) and annual (10-K) reports, which are available through the SEC's EDGAR database. Investors who want a clearer picture of a company's operating performance can subtract unrealized gains (after taxes) from net income to calculate an adjusted earnings-per-share figure. Alternatively, reviewing operating income-which generally excludes paper gains-can provide a more accurate view of how much profit is generated by the company's main business activities.
According to Amazon's official Q2 2026 earnings release, the company's $62.6 billion net income was overwhelmingly driven by a $53.4 billion unrealized gain from its investment in Anthropic. The remaining $9.2 billion came from Amazon's core operations. For comparison, the S&P 500's average trailing P/E ratio hovered around 24 during the same period, while Amazon's headline P/E appeared much lower due to the accounting treatment of these paper gains.
Understanding the impact of unrealized gains is essential for investors who want to avoid being misled by headline earnings numbers. While these gains can temporarily boost reported profits, they do not reflect cash flow or the ongoing profitability of a company's main business. Investors should dig into the details of earnings reports and consider both operating income and the liquidity of investment holdings before making decisions based on net income figures.
Unrealized gains and losses are a recurring feature of modern corporate accounting, especially for companies with large investment portfolios or stakes in private firms. While these accounting rules aim to provide a more complete picture of a company's financial position, they can also introduce volatility and obscure the true drivers of profitability. For investors, distinguishing between operating results and paper profits is a critical step in evaluating the real value and risk of a stock.
