Amazon (AMZN) shares fell 3% on Monday following a downgrade by Wells Fargo (WFC) analysts, who warned that despite the company’s strong presence in the cloud services sector, various challenges may impede its profit margins.
Analyst Ken Gawrelski lowered Amazon’s rating from Overweight to Equal Weight and reduced the price target from $225 to $183. “While AMZN has consistently been a story of positive revisions, we anticipate several factors will exert pressure on revisions in the near term,” he noted in his report.
Key challenges facing Amazon include intensifying competition from Walmart (WMT), a decrease in the contribution from its advertising business to overall operating income, and significant costs associated with its satellite broadband initiative. Gawrelski stated, “Considering these headwinds, Amazon continues to present a story of margin expansion, albeit at a pace that may be more moderate than market expectations.”
Gawrelski is among a minority of Wall Street analysts, with only five not recommending a buy on the popular stock, according to Bloomberg data. He projects the share price to reach $187 within the next year, while the broader Wall Street consensus anticipates a more optimistic outlook, forecasting a rise of over 20% to approximately $220.
In its latest earnings report released in early August, Amazon fell short of Wall Street expectations. However, its cloud division, Amazon Web Services (AWS), has helped mitigate the effects of disappointing retail sales growth. AWS generated $26.3 billion in revenue in the second fiscal quarter, exceeding analyst predictions and reflecting a 19% year-over-year increase. While the advertising segment also saw a robust 20% revenue growth, its $12.8 billion in sales for the quarter ending June 30 narrowly missed expectations.
Amazon is one of the “Magnificent Seven” tech stocks that have significantly gained traction over the past year, primarily driven by investor enthusiasm surrounding generative artificial intelligence. The company’s stock has risen 42% compared to last year.
AWS has capitalized on the AI trend, launching numerous AI tools for both developers and consumers over the past year. The segment is also generating substantial revenue by leasing space in its remote data centers to clients developing AI software. Amazon anticipates that AI will contribute billions in revenue in the upcoming years. However, Wells Fargo contends that these advancements may not sufficiently compensate for the challenges in Amazon’s other business sectors, which could hinder profit growth.
Gawrelski pointed out that Walmart’s expanding fulfillment services are likely to pressure the fees Amazon can charge merchants for logistics services. He highlighted that Walmart’s fulfillment options for sellers are about 15% cheaper, suggesting that if Amazon is compelled to lower its fees, it could negatively impact income from its retail operations.
Moreover, Amazon’s Project Kuiper, an initiative to establish itself as a satellite broadband service provider competing with SpaceX’s Starlink, is expected to reduce operating income by $3 billion in 2025 and 2026, according to Gawrelski. He further noted that advertising sales growth is expected to be “much more modest” between 2025 and 2027.
In a separate development, a judge ruled that the Federal Trade Commission’s antitrust case against Amazon will proceed.
Despite the downgrade, Wells Fargo remains optimistic about Amazon’s performance in the third quarter, raising its earnings per share forecast from $1.18 to $1.26, significantly above the consensus estimate of $1.15, as reported by Bloomberg.
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