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Amazon saw a rare analyst downgrade as Wells Fargo’s Ken Gawrelski believes strength in its cloud computing business won’t be enough to stave off other hurdles to its profit margins.
"AMZN has been a consistent positive revision story, but we believe factors pressure revisions in the near term," Gawrelski wrote in a note Monday attained by RetailWire. Wells Fargo’s rating on Amazon was reduced from “Overweight” to “Equal Weight,” the equivalent of going from “Buy” to “Hold.”
Among the threats to Amazon’s margins:
- FBA fee pressure from Walmart: Gawrelski sees rising competition from Walmart’s burgeoning fulfillment services business putting pressure on the fees Amazon can charge merchants for storing, packing, and shipping their products. The analyst wrote, “WMT recently expanded fulfillment offerings to off-platform sales and is pricing its 3p merchant logistics offering 15%+ cheaper than FBA. Believe current WMT impact more likely on AMZN merchant services vs. consumer wallet share.”
- Amazon’s advertising growth moderation: Gawrelski estimates that merchant advertising to gross merchandise value (GMV) increased from 3.7% in 2020 to 6.0% in 2024 but will expand “at a much more modest pace” between 2025 and 2027 “as reinvestment rate plateaus.” Advertising margins will also face pressures as ad revenue becomes increasingly “associated with costly content rights,” particularly its recent contract to air NBA games on Prime Video starting with the 2025/2026 season.
- Amazon’s Project Kuiper costs: Gawrelski estimates that Project Kuiper, Amazon’s initiative to become a satellite broadband internet service provider and rival to SpaceX’s Starlink, will shave $3 billion off its operating income in 2025 and 2026.
Gawrelski argued that while Amazon Web Services (AWS), its cloud business, remains a tailwind supporting operating income, “AWS strength alone is not enough.”
The analyst said that the market is more prepared for pressure on Q4 operating income but warned that margin expansion could also be capped in the first half of 2025.
“Amazon is likely still a solid margin expansion story over the long term,” said Gawrelski. “We remain convinced that NA Retail Margins will eventually reach double digits. But as Amazon management has said multiple times, margin expansion won't be linear. We, and market consensus, likely became a bit exuberant in our extrapolation of margin expansion trends in 2023 and early '24 to '25 and beyond forecasts.”
Wells Fargo’s price target on Amazon was slashed to $183 from $225.
Shares of Amazon on Monday fell $5.71, or 3.1%, to $182.24. Wells Fargo is one of the few Wall Street firms not to have a “buy” rating on Amazon. Wall Street analysts see Amazon stock rising over 20% to about $220 in 2025, according to Bloomberg consensus estimates.
Though Amazon stock closed 3% lower on Monday after Gawrelski downgraded shares, it is up 42% overall from last year, benefiting from sitting among the so-called Magnificent Seven tech stocks that have benefited from investor hype over generative AI. Amazon’s AWS segment has launched a host of AI tools for developers and consumers over the past year.
Amazon’s second-quarter results released in early August fell short of Wall Street’s forecasts as a better-than-expected performance at AWS couldn’t offset weaker-than-expected growth in retail sales. AWS sales grew 19% year-over-year. Meanwhile, Amazon’s Online sales rose 4.6%, down from growth of 7% a year ago, with a similar slowdown seen in physical stores. Advertising segment revenues surged 20%, just short of expectations.
Among analysts more bullish on Amazon, Truist’s Youssef Squali on Sept. 30 reiterated his “buy” rating and raised his price target to $265 from $230 as he expects sustained growth in advertising revenue, accelerated AWS expansion, and improved year-over-year operating margins to offset significant investments artificial intelligence, AWS, logistics, and Project Kuiper.
This past Monday, Mizuho Securities analyst James Lee reiterated his “Outperform” rating on Amazon at a price target of $240 after a recent quarterly survey of AWS customers conducted with a prominent channel partner found regional banks increasing their workload migration investments and enterprise customers strongly committing to generative AI investments.