Amazon's cloud-computing services business is facing near-term headwinds, while the impact of artificial intelligence spending remains in the early-stage, according to a UBS analyst note Tuesday. UBS trimmed its revenue estimates for the Amazon Web Services division and slightly lowered its price target for Amazon stock.
In a new client note, UBS analyst Lloyd Walmsley maintained a buy rating for Amazon but trimmed the price target for Amazon stock to 178, from 180. On the stock market today, Amazon stock closed trading down less than 1% at 131.47.
"We remain bullish on shares over the medium term given our view that AWS growth should be bottoming and retail margins are in the early innings of significant expansion over the next year," Walmsley wrote. "But in the near-term we see some risk that late-quarter cloud softness, more in-line trends in eCommerce for 3Q, and some potential margin headwinds from higher energy prices and seasonal hiring could make it more difficult for bulls to feel more confidence in the medium term this quarter."
'Cost Pressure' For Cloud
Amazon Web Services is a key profit driver for the tech behemoth, and closely watched by Wall Street. After years of rapid gains, AWS sales growth has been pressured in recent quarters, as broader cloud spending by companies slowed.
The change in Amazon stock's price target from UBS includes lower expectations for AWS to close out the year. UBS trimmed its estimated year-over-year AWS growth for the third quarter to 11.3% from 12.3%. Fourth-quarter estimates were lowered to 12.1% annual growth, down from 13.2%. Those projections represent $22.86 billion for AWS revenue in the third quarter and $23.97 billion in the fourth quarter.
The projections are based on a related cloud-market research note from UBS, also sent to clients on Tuesday. UBS analyst Karl Keirstead said check-ins with large enterprise customers found that overall cloud infrastructure spending is stable, but there is less confidence about "material improvement" for the end of the year.
"While we did hear some partners cite solid pipeline growth, there was less confidence in when this pipeline would actually convert to cloud usage, given longer sales cycles, lower conversion rates and, as one partner said, 'immense cost pressure,' " Keirstead wrote.
Meanwhile, there is broader excitement about AI boosting corporate cloud spending. But the report also said, "On the AI front, the near-unanimous view was that enterprise spend remains very early stage."
Amazon is scheduled to report earnings on Oct. 26. Walmsley wrote that Amazon stock analysts will be listening closely for the company's commentary on growth reacceleration for AWS in the fourth-quarter. Further, they will want to hear about the company's efforts in adopting generative AI.
Last month, Amazon announced it would invest up to $4 billion in AI firm Anthropic.
Amazon Stock: How Wall Street Views AWS For Q3
UBS estimates for AWS are slightly below Wall Street's consensus for the third-quarter. Overall, analysts project Amazon will post a 12.6% year-over-year increase in AWS revenue to $23.1 billion, according to FactSet.
Evercore ISI analyst Mark Mahaney named Amazon stock a top pick for Q3 earnings and wrote in an Oct. 12 client note that "the bottom appears to be in when it comes to AWS's revenue growth."
But MoffettNathanson analyst Michael Morton wrote that "we are not able to get investors comfortable on AWS's near-term growth rate," in an Oct. 11 note. Morton was otherwise positive on the stock.
Further, Stifel analyst Mark Kelley on Monday initiated coverage of Amazon with a buy rating and 173 price target. Along with the advantages of Amazon's scale in retail, Stifel sees near-to-medium term "stabilization in cloud spending trends that should benefit AWS," Kelley said in a note.
Amazon stock has gained 57.8% on the year coming into trading Tuesday.
