Sell-side remains bullish on Amazon

Amazon’s (NASDAQ:AMZN) post-Q2 losses accelerated on Friday as Wall Street continued to punish the stock for a revenue miss and soft guidance, wiping out $200 billion dollars of value. Although AWS gave an upside surprise with 19% growth (vs 17.6% estimates) and margins were strong, market participants are more concerned with what many see as open-ended spending on AWS and Project Kuiper without any definitive estimates pertaining to return on investment.

“The concern from here likely switches from AWS re-acceleration concerns to views of a softening consumer, effect on margins and rising CAPEX intensity,” RBC Capital said in a note to investors on Friday.

But does the price action since Thursday’s close justify the results? Analysts remain predominately bullish on Amazon (AMZN), viewing the latest price as not accurately reflecting fundamentals of the business.

For RBC Capital – currently maintaining an Outperform rating and $215 price target – AWS reacceleration back to the 20s appears on the horizon with chip constraints likely to ease next year, while store-specific margins indicate the bull case for AMZN remains largely on track.

JMP is also keeping its Outperform rating and bumped up its target price to $245, impressed by Amazon’s AWS growth rate and its commentary regarding strong demand trends.

“With AWS revenue growth accelerating, faster shipping times improving conversion rates, and overall cost-to-serve declines, we believe Amazon delivered strong Q2 results,” said Citigroup, reiterating its Buy recommendation and $245 PT.

Although investments are ramping up as Project Kuiper nears launch and as the company incorporates AI across its services, Citigroup believes the company can deliver continued growth and margin expansion such that Q3 operating income guide could prove conservative.

Seeking Alpha investor group The Asian Investor agrees. “The most important figure, in my opinion, was the amount of operating income that [AWS] incrementally added to Amazon’s consolidated results.”

“Amazon is deservedly trading at one of the highest P/E ratios in the market because of its stronger than average EPS growth that is projected for the future. This growth hinges chiefly on Cloud and although Amazon slightly disappointed with its top-line performance in Q2, the Cloud growth story is fully intact,” the group added.

Finally, Morgan Stanley weighed in, though was more conservative than peers as management’s comments about incremental investment in Kuiper pressuring profits and pressure on consumer spending creates additional near-term ambiguity about the slope of profits to come.

“This moves AMZN to somewhat of a tactical show-me/execution story on growth and profitability,” Morgan Stanley analyst Brian Nowak said in his research report. While Nowak kept his Overweight rating on Amazon’s high-margin businesses, advertising growth, and AWS potential, there is risk from longer-than-expected investments in AWS as well as the potential for AWS revenue to decelerate and/or margins to decline.