Amazon stock falls as Wells Fargo downgrades shares

Shares of Amazon (AMZN) closed 3% lower on Monday as analysts at Wells Fargo (WFC) downgraded the shares, noting that the company's strength in the cloud services market will not be enough to overcome other hurdles for its to ward off profit margins.

Wells Fargo analyst Ken Gawrelski downgraded the stock from Overweight to Equal Weight and lowered his price target on the stock from $225 to $183.

“AMZN has been a consistently positive revision story, but we believe factors are putting pressure on revisions in the near term,” he wrote in a note on Monday.

Challenges facing Amazon include increasing competition from Walmart (WMT), the modest contribution of its advertising business to operating income, and the high costs associated with its satellite broadband project.

“When these headwinds are considered in context, Amazon remains a story of margin expansion, but likely at a more moderate pace of margin expansion than the market expects,” Gawrelski wrote.

According to Bloomberg data, Gawrelski is one of only five Wall Street analysts who do not recommend buying the popular stock. He expects the stock price to be $187 next year. Meanwhile, Wall Street analysts expect Amazon shares to rise over 20% to around $220, according to consensus estimates from Bloomberg.

Amazon's most recent earnings report from early August fell short of Wall Street forecasts. But the strength of its cloud services unit, Amazon Web Services, helped offset weaker-than-expected growth in retail sales. AWS, which houses Amazon's AI services, generated revenue of $26.3 billion in the company's second fiscal quarter, above analyst forecasts and 19% higher than a year earlier. The advertising segment also saw a 20% increase in revenue, but reported revenue of $12.8 billion for the three months ended June 30 fell just short of expectations.

Amazon is one of the so-called Magnificent Seven tech stocks that posted massive gains last year thanks to investor hype around generative artificial intelligence. Amazon shares are up 42% year-over-year.

The rapid expansion of Amazon Web Services reflects the AI ​​trend. Amazon's AWS segment has launched a variety of AI tools for developers and consumers over the past year. AWS makes more money by renting space in its far-flung data centers to customers who want to run hungry AI software. Amazon expects AI to generate billions of dollars in sales in the coming years. However, Wells Fargo believes that advances in AI will not be enough to offset the disadvantages of Amazon's other businesses, which could hinder the company's profit growth.

Wells Fargo's Gawrelski said increasing competition from Walmart's emerging fulfillment services business will put pressure on the fees Amazon can charge merchants to store, pack and ship their products. Gawrelski noted that Walmart's fulfillment offerings are about 15% cheaper for sellers. If Amazon is forced to reduce its fees, it would reduce its revenue from the retail segment.

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Meanwhile, Amazon's Project Kuiper, its initiative to become a satellite broadband internet service provider and compete with SpaceX's Starlink, will save $3 billion in operating revenue in 2025 and 2026, Gawrelski estimated. He added that Amazon's advertising sales will grow at a “much more modest pace” between 2025 and 2027.

Also on Monday, a judge ruled that the Federal Trade Commission's antitrust case against Amazon will move forward.

Wells Fargo expects Amazon to beat expectations in the third quarter. The company raised its forecast for Amazon's third-quarter earnings per share to $1.26 from $1.18, well above the consensus estimate of $1.15, according to Bloomberg data.

Laura Bratton is a reporter for Yahoo Finance.

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