Why One Analyst Just Downgraded Amazon Stock Ahead of Earnings

Barchart · 10/15 15:07

As the third-quarter earnings season starts to kick off in earnest, Amazon.com (AMZN) is one of many mega-cap stocks slated to report its latest quarterly results next week. Ahead of the event, Wells Fargo analyst Ken Gawrelski has low expectations, downgrading AMZN stock from "Overweight" to "Equal Weight" and cutting its price target from $225 to a new Street-low of $183.

In a note to clients, Gawrelski expressed concerns that investors might be too optimistic Amazon can continue its trend of linear margin expansion, even amid near-term headwinds.

"While the market is more prepared for pressure on Q4 operating income, we caution that margin expansion could be capped in the first half of 2025," he wrote. "…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."

AMZN is still one of the highest-rated stocks among the "Magnificent Seven" group of tech giants, but the shares haven't joined the broader S&P 500 Index ($SPX) in hitting new record highs this week. Down 7% from its July peak, is now an opportune time to buy the dip in AMZN ahead of earnings?

About Amazon Stock

Amazon.com (AMZN) is not only one of the leading ecommerce companies globally, it has also revolutionized the cloud computing industry via its Amazon Web Services (AWS) offering. Thanks to its flagship Amazon Prime subscription services, Amazon has become a juggernaut, with a market cap of $1.95 trillion.

AMZN stock has risen 23.1% year-to-date, narrowly surpassing the S&P 500's gain of 22%, but the stock has yet to revisit its July highs north of $201. Over the past three months, AMZN has lagged the broader market with a decline of about 3%.

Amazon Cratered After Q2 Earnings

In its second-quarter earnings report, Amazon beat Wall Street's bottom-line expectations - but the shares fell as revenue came up short, and the company offered soft guidance.

The e-commerce company posted Q2 earnings per share (EPS) of $1.23, outpacing the consensus forecast of $1.05. However, revenue of $147.9 billion fell short of the projected $148.63 billion. AWS was a major pocket of strength, with revenue from the segment up by a stronger-than-forecast 19% to $26.3 billion.

On the Q2 conference call, management confirmed that operating margins for AWS would be “lumpy” quarter to quarter, with Prime Day historically compressing margins during Q3.

Amazon guided for Q3 revenue of $154 billion and $158.5 billion, which fell short of analysts' estimates. The shares fell nearly 9% in a single session post-earnings, exacerbated by a wider sell-off in U.S. markets on Aug. 2.

Is AMZN Stock a Buy?

On average, Wall Street is now looking for Q3 earnings of $1.14 per share from Amazon, up 34% year over year, with the revenue forecast downwardly revised to $157.24 billion.

Wall Street analysts remain largely bullish on Amazon's prospects, with 44 out of 48 giving the stock a “strong buy” rating. Wells Fargo has the only “hold” equivalent, and there are no “sell” ratings on AMZN.

The average price target for AMZN is $225.98. Based on current prices, that implies expected upside of about 20%.

At current levels, AMZN looks reasonably valued. The stock trades at a forward price/earnings multiple of 39.68, compared to a multiple of 45x around this time last year.

More Stock Market News from Barchart

On the date of publication, Nauman Khan did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.