Cloud Computing Giant Faces Headwinds Despite Strength in AI-Driven Segment
Amazon’s stock took a 3% hit on Monday after Wells Fargo analysts downgraded the e-commerce behemoth’s shares, citing concerns that its dominance in cloud services won’t be enough to offset mounting challenges to its profit margins. The downgrade, from “Overweight” to “Equal Weight,” was accompanied by a reduced price target of $183, down from $225.
According to Wells Fargo analyst Ken Gawrelski, Amazon’s consistent positive revision story is about to hit a speed bump. He points to rising competition from Walmart’s fulfillment services, moderating growth in its advertising business, and the hefty costs associated with its satellite broadband project, Project Kuiper. While Amazon remains a margin expansion story, Gawrelski predicts a more moderate pace of growth than the market expects.
Gawrelski is one of the few Wall Street analysts who don’t recommend buying the popular stock, with a 12-month price target of $187. In contrast, the Bloomberg consensus estimate suggests Amazon’s stock will rise over 20% to around $220.
Amazon’s recent earnings report fell short of expectations, but its cloud services division, Amazon Web Services (AWS), has been a bright spot. AWS generated $26.3 billion in revenue during the second fiscal quarter, up 19% year-over-year. The segment has launched a range of AI tools for developers and consumers, capitalizing on the growing demand for artificial intelligence.
However, Wells Fargo believes that Amazon’s AI-driven growth won’t be enough to offset the downsides from its other businesses. The company’s retail segment faces pressure from Walmart’s cheaper fulfillment services, which could force Amazon to lower its fees and cut into its income. Additionally, Project Kuiper is expected to shave $3 billion off Amazon’s operating income in 2025 and 2026.
Despite these challenges, Wells Fargo expects Amazon to beat expectations in the third quarter, with earnings per share forecasted to reach $1.26, above the consensus estimate of $1.15.
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