As Amazon.com, Inc. (NASDAQ:AMZN) prepares to release its third-quarter earnings, one prominent analyst has expressed concerns about the company’s ability to maintain its recent financial performance. Wells Fargo analyst Ken Gawrelski downgraded Amazon stock from “Overweight” to “Equal Weight,” citing doubts about future margin expansion. This Amazon stock downgrade has raised questions about the company’s short-term prospects, despite its solid year-to-date performance.

Why Was Amazon Stock Downgraded?

In his note to clients, Gawrelski pointed out that the market might be too optimistic about Amazon’s ability to continue its trend of margin growth. While Amazon has experienced strong financial performance over the past year, the analyst warns that challenges may arise in the near term, particularly regarding operating income in the fourth quarter and early 2025.

“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,” Gawrelski wrote. This concern over margin compression led him to reduce Amazon’s price target from $225 to $183, setting a new Street-low for the stock.

Despite this Amazon stock downgrade, Gawrelski remains optimistic about the long-term potential of the company, acknowledging that Amazon continues to be one of the highest-rated stocks among the so-called “Magnificent Seven” tech giants. However, the short-term outlook has become murkier as Amazon grapples with several headwinds.

Recent Performance of Amazon Stock

Amazon stock has gained 23.1% so far in 2024, narrowly surpassing the 22% increase in the S&P 500 Index. However, the stock has not returned to its July highs, where it traded north of $201. Over the last three months, Amazon shares have dipped by approximately 3%, reflecting the market’s broader concerns about tech valuations and the company’s recent performance.

Amazon’s second-quarter earnings report provided a mixed bag of results. While the company exceeded Wall Street’s earnings-per-share (EPS) expectations with $1.23 per share, revenue fell short at $147.9 billion, missing the $148.63 billion forecast. Amazon Web Services (AWS), a critical component of Amazon’s business, grew revenue by 19%, which was better than expected. However, challenges with operating margins and soft revenue guidance for Q3 contributed to the stock’s nearly 9% drop after the Q2 earnings call.

Expectations for Amazon’s Q3 Earnings

Wall Street remains cautiously optimistic about Amazon’s third-quarter earnings, though some concerns linger. On average, analysts are expecting Q3 earnings of $1.14 per share, a 34% increase year-over-year. However, the revenue forecast has been revised downward to $157.24 billion, reflecting tempered expectations following the Q2 miss.

Despite the Amazon stock downgrade by Wells Fargo, most analysts continue to be bullish on the company. Out of 48 analysts covering the stock, 44 rate it as a “strong buy,” and none have issued a “sell” rating. The average price target for Amazon stands at $225.98, implying an upside of about 20% from current levels.

Is Amazon Stock a Buy After the Downgrade?

Even with the recent Amazon stock downgrade, the company remains a dominant force in both e-commerce and cloud computing. Its flagship subscription service, Amazon Prime, has entrenched it as a leader in global online retail, while AWS continues to drive significant growth in the cloud computing sector. The company’s current market capitalization of $1.95 trillion attests to its enduring value in the tech landscape.

Amazon stock is currently trading at a forward price-to-earnings (P/E) ratio of 39.68, down from 45x at this time last year. For long-term investors, this presents a more reasonable valuation, especially as the stock has shown resilience despite broader market challenges. With the possibility of further growth in AWS and the company’s continuous innovation in e-commerce, Amazon remains a compelling buy for those with a long-term outlook.

However, in the short term, Gawrelski’s Amazon stock downgrade highlights the potential for challenges ahead. Investors should be mindful of the near-term risks associated with margin compression and the company’s ability to meet its operating income targets.

Conclusion

Amazon’s upcoming Q3 earnings report will be a key moment for the stock, as investors await more clarity on the company’s performance and future prospects. While the Amazon stock downgrade by Wells Fargo signals caution in the near term, the company’s long-term outlook remains strong. With AWS leading the charge in cloud computing and Amazon Prime’s dominant market position, Amazon is likely to remain a cornerstone of the tech industry for years to come.

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