Amazon (AMZN) shares moved firmly higher Thursday after analysts at Wells Fargo initiated coverage of the retail and cloud giant, noting the potential for improved profit margins amid fading inflation prospects and the group's recent cost-cutting effort.
Wells Fargo analyst Ken Gawrelski kicked-off coverage of Amazon with an 'overweight' rating, as well as a $159 price target, as part of a broader report on fourteen different stocks in the large-cap tech sector. Amazon Web Services profit margins, Gawrelski said, will likely return to 2018 levels a year earlier than forecast, as companies resume their cloud spending, inflation pressures ease.
A smaller fulfilment center footprint, as well as its ongoing transition to regional -- as opposed to national models -- could also drive as much as $6.5 billion in savings this year, a figure that represents around a third of the group's operating income.
"We are tactically positive on the AWS business given second half reacceleration potenital, but see market share trend versus Azure obscuring longer-term optimism," Gawrelski wrote. "Additional tailwinds for operating income will come from warning inflation, cancellation of (fulfilment center) build plans (and) headcount reductions".
Amazon shares were marked 3% higher in early Thursday trading to change hands at $124.82 each, a move that extends the stock's year-to-date gain to around 48%.
Amazon CFO Brian Olsavsky told investors in April that AWS growth rates were slowing markedly into the start of the current quarter. AWS contributed $21.4 billion, rising 16% from last year, slowing five percentage points from the three months ending in December but coming in just ahead of the Street forecast of around $21.2 billion.
Operating income was pegged at $5.1 billion, down 21.8% from last year's total.
Online sales were 3% from last year to $51.1 billion, suggesting moderately improving consumer spending over the first three months of the year, with the tally largely matching Street forecasts.
Looking into the current quarter, Amazon said it sees operating income of between $2 billion $5 billion on revenues in the range of $127 billion to $133 billion, compared to the Refinitiv forecast of around $129.8 billion.
CEO Andy Jassy has pared more than 27,000 jobs from Amazon's 1.5 million world-wide workforce so far this year, citing an "uncertain and difficult" global economy.
That still may not be enough to 'right size' the group's business heading into a weaker U.S. economy over the second half of the year, however, while charges related to the layoffs, as well as increasing spending on AI and web services developments will likely erode at least some of Amazon's near-term profits.
"Over the last several months, we took a deep look across the company, business by business, invention by invention, and asked ourselves whether we had conviction about each initiative’s long-term potential to drive enough revenue, operating income, free cash flow, and return on invested capital," Jassy told investors in his annual letter to shareholders on April 13.
"There are a number of other changes that we’ve made over the last several months to streamline our overall costs, and like most leadership teams, we’ll continue to evaluate what we’re seeing in our business and proceed adaptively," he added.
