Wells Fargo cuts Amazon’s rating as headwinds pressure OI, margins in the near term

Wells Fargo cut its rating on Amazon.com (NASDAQ:AMZN) to “equal weight” from a previous investment rating of “overweight” on Monday. They note that the company has been “a consistent positive revision story” but now see several factors pressure revisions in the near term.

Shares of the company were down nearly 3% in early open market trading.

The research firm thinks among main headwinds are the company’s investment in Project Kuiper, the anticipated FBA fee pressure, and moderating advertising operating income contribution. They said the market is more prepared for pressure on Q4 OI and also warned that margin expansion could be capped in the first half of 2025.

“Amazon is likely still a solid margin expansion story over the long term. 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 said in their October 7 research note.

Wells Fargo sees Amazon’s Q3 revenue near the midpoint of guidance at $157.1B, with AWS a bit stronger and retail a bit weaker driven by similar factors as 2Q—a mixed consumer and trade-down pressure on average selling prices. They forecast Q4 revenue in the $181B-$188B range. Operating income for Q3 was revised slightly higher to $16.1B from $15.8B on stronger AWS. They cut the Q4 OI estimate to $17.2B from $18.5B.

AMZN has a PT of $183, cut from $225, implying a downside of nearly 2%. Stock is +23% YTD while the S&P 500 is +21%.