While the explosion of A.I. is the big buzz in 2024, the growth that has been seen from Amazon.com Inc. (NASDAQ: AMZN) has always been impressive. Its valuations have also always been more than impressive. And betting against the stock’s incredibly high P/E ratios in the past killed more than a few hedge funds. Amazon’s revenues prove how much growth there has been — rising from $2.7 billion in 2000 up to about $575 billion in 2023. So, what if the value and growth proposition of Amazon has somehow finally peaked?
Wells Fargo issued a rare downgrade on Amazon.com on Monday, cutting the rating to Equal Weight from Overweight. Amazon’s price target was also chopped down to $183 from $225.
Ken Gawrelski is the Wells Fargo analyst who issued the call. As this is very much not in-line with consensus, there is a more vocal “strategic” case being presented for investors. It is also worth noting that it is not even based just on Amazon’s “return to the office” policy for its employees. Over 90% of Amazon’s analysts have Buy ratings (or equivalent) and the consensus analyst price target is closer to $230. His take is that Amazon’s positive estimate revisions now face multiple headwinds.
Oggonomics always reminds its readers that no single analyst call should ever act as the sole catalyst to buy or sell a stock. And this one downgrade is definitely an “against the grain” call compared to the rest of Wall Street’s calls. That said, it stands out so much from the pack that it’s 2.7% negative stock reaction during the same morning has taken out more than $55 billion worth of Amazon’s market capitalization.
Amazon’s web services unit (AWS) has seen massive growth, but Gawrelski says this online growth in the cloud is just not enough to justify the prior rating. He also sees limited visibility for positive estimate revisions out into 2025.
Other near-term headwinds are coming from Project Kuiper investment as well as moderate contributions from Amazon’s advertising growth. One threat comes from Walmart, Inc. (NYSE: WMT), where the competition for online sellers could put pressure on Amazon’s merchant fees. This one sentence pretty much sums up the call:
While Amazon remains a margin expansion story, we see a more moderate margin expansion pace than the market expects.
Amazon’s all-time of $201.20 was hit on July 8, 2024. By August 5, 2024, the stock was back down to $161.00 before recovering. With consensus earnings estimates of $4.73 EPS for 2024 and $5.82 EPS for 2025, Amazon’s stock (based on Friday’s closing price) was valued at 39.4-times 2024 and 32-times 2025 earnings estimates.
Now Amazon has traded in the red for 8 of the last 9 trading sessions including this downgrade day. Amazon shares closed on Friday at $186.51. Its shares were last seen on Monday trading down 2.75% at $181.40.
More than 90% of the analysts who rate Amazon do not agree with this call. And none of the major firms have the equivalent of “Sell” ratings on Amazon. That may change based on earnings, but the research community almost always seems to be very skewed to the “buy” ratings with upside targets. Some analysts even have price targets up as high as $240, $250 and one call from JMP Securities (reiterated just last week) has a target price all the way up at $265.
A week earlier the team at Morgan Stanley maintained an overweight rating and $210 price target, but the call did warn that Amazon’s focus on lower-priced and lower-margin essentials are weighing on margins and holding back North American retail profits. That call warned that some strategic weakness may be seen, but the report suggested that investors should buy into that weakness after the numbers potentially reset.
Again, investors should never rely upon one research report to make a decision to buy or sell a stock. And the team at Cantor Fitzgerald just reiterated Amazon’s Overweight rating with a $230 price target on the same day as the Wells Fargo downgrade. How you decide to trade or invest in Amazon is up to you and your financial advisor.
