TLDR:
- Wells Fargo downgraded Amazon stock from Overweight to Equal Weight
- Price target lowered from $225 to $183
- Challenges include rising competition from Walmart and high costs of Project Kuiper
- Amazon’s cloud and AI services remain strong, but may not offset other business pressures
- A judge ruled that the FTC’s antitrust case against Amazon will proceed
Amazon, the e-commerce and cloud computing giant, is facing new challenges as Wells Fargo analyst Ken Gawrelski downgraded the company’s stock from Overweight to Equal Weight on Monday, October 7, 2024.
This move, coupled with a reduction in the price target from $225 to $183, sent Amazon’s stock down 3% at market close.
Gawrelski cited several factors contributing to the downgrade, including increased competition from Walmart, moderating growth in the company’s advertising business, and high costs associated with Project Kuiper, Amazon’s ambitious satellite broadband initiative.
Walmart’s expanding fulfillment services business is putting pressure on Amazon’s fees for merchants. The analyst noted that Walmart’s offerings are approximately 15% cheaper, which could force Amazon to lower its fees and potentially impact its retail segment income.
Project Kuiper, Amazon’s answer to SpaceX’s Starlink, is expected to have a significant impact on the company’s bottom line. Gawrelski estimates that the satellite internet project will reduce Amazon’s operating income by $3 billion in both 2025 and 2026.
Despite these challenges, Amazon’s cloud services division, Amazon Web Services (AWS), continues to show strength. In the company’s most recent earnings report, AWS generated $26.3 billion in revenue during the second fiscal quarter, exceeding analysts’ expectations and showing a 19% year-over-year increase.
The cloud segment has been bolstered by the growing demand for AI services, which AWS has been actively developing and launching over the past year.
Amazon’s advertising segment also posted impressive growth, with revenue surging 20% to $12.8 billion for the three months ended June 30. However, this figure fell slightly short of market expectations.
The company remains part of the “Magnificent Seven” tech stocks that have seen substantial gains over the past year, driven by investor enthusiasm for generative artificial intelligence. Amazon’s stock has risen 42% from the previous year, reflecting this broader trend in the tech sector.
While Wells Fargo expects Amazon to beat expectations in the third quarter, raising its earnings per share outlook from $1.18 to $1.26 (above the consensus estimate of $1.15), the firm believes that the company’s overall growth story may be moderating.
Adding to Amazon’s challenges, a judge recently ruled that the Federal Trade Commission’s antitrust case against the company will move forward. This development could potentially impact Amazon’s business practices and market position in the future.
Gawrelski’s downgrade puts him in a small minority of Wall Street analysts who don’t currently recommend buying Amazon stock.
The majority of analysts maintain a positive outlook, with a consensus price target of around $220, representing a potential 20% upside from current levels.
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