Amazon is getting ready to take its business into space, with a satellite internet business it hopes will grow alongside the tech giant's e-commerce and cloud computing empires. But what will it mean for Amazon stock?
While Amazon doesn't expect to launch its first satellites until early next year, debate is heating up among analysts about what the Project Kuiper endeavor will mean for the company's efforts to boost profitability. Project Kuiper recently factored into an analyst's decision to downgrade Amazon stock to a neutral call. But some analysts are more bullish. Amazon will report third quarter results on Oct. 31, with investors likely expecting an update on the company's Kuiper spending.
Here's what to know about Project Kuiper and Amazon stock:
What Is Amazon's Project Kuiper?
Project Kuiper is Amazon's satellite internet business, which it hopes will bring connectivity to 400 million to 500 million households as well as some governments and enterprises. Chief Executive Andy Jassy described it as a "very large revenue opportunity" in a letter to shareholders published in April. It would compete against the market-leading Starlink service from Elon Musk's SpaceX.
The name is a reference to the Kuiper belt, a distant region of the solar system. Amazon first announced the project in 2019 and received approval from the Federal Communications Commission a year later.
While Amazon founder Jeff Bezos has his own rocket company called Blue Origin, Project Kuiper is not affiliated. Amazon considers Kuiper part of its Devices and Services division, along with Echo devices and Kindle e-readers.
Project Kuiper will rely on more than 3,000 satellites in low-Earth orbit, according to a dedicated page on Amazon's website. The company launched two test satellites last year. Amazon's license from the Federal Communications Commission requires that it deploy at least half of its satellite constellation by July 2026.
The company has committed to spend at least $10 billion on the effort. Amazon plans to launch its first satellite constellation early next year with commercial service also beginning in 2025. An earlier goal of launching satellites before the end of the year was delayed so Amazon's launch partner, United Launch Alliance, could prioritize U.S. Space Force missions, an Amazon representative told PC Mag.
Why Are Analysts Debating Kuiper?
Wall Street commentary around Kuiper picked up following Amazon's second-quarter earnings report on Aug. 1. The operating margin for Amazon's North America division decreased to 5.6% for the second quarter, compared with 5.8% in Q1. That fact, plus lower-than-expected overall revenue, contributed to a slide for Amazon stock following the report.
"The overall North America segment operating margin decreased slightly due to increased Q2 spend in some of our investment areas, including Kuiper," Amazon Chief Financial Officer Brian Olsavsky told analysts following the report.
Olsavsky declined to further detail Amazon's Kuiper spending on the call. Analysts have been working to sort out what the project could mean for the company's North America margins. Jassy has cut back on most other big swing projects from Amazon and focused on improving the efficiency and profitability of its retail operations.
What Will Project Kuiper Mean For Amazon's Profitability?
Wells Fargo cited concerns that Kuiper will weigh on Amazon's margins when it downgraded its view on Amazon stock from overweight to a neutral equal weight earlier this month. Analyst Ken Gawrelski is also worried about Amazon's operating profits taking a hit from competition from Walmart and slower growth from Amazon's margin-boosting advertising business.
Meanwhile, in an Oct. 10 client note, Morgan Stanley analysts estimated Project Kuiper would be a $1.5 billion headwind on Amazon's earnings before interest and taxes. That estimate factors in the delay for its first launch from late this year to 2025.
However, Morgan Stanley analyst Brian Nowak wrote that the costs should still be "manageable" when compared with the $75 billion to $80 billion analysts project for Amazon's total 2025 operating income. Morgan Stanley rates Amazon stock a positive overweight with a price target of 210.
Amazon Q3 Results Due Oct. 31
Amazon stock has traded sluggishly since July. Shares hit an all-time high near 201.20 early that month before pulling back, driven in part by the disappointing second quarter earnings statement in early August.
"Shares have underperformed since the 2Q report on August 1, reflecting debate related to initiatives like Project Kuiper and associated costs," Wedbush Securities analyst Scott Devitt wrote to clients Thursday.
However, Devitt said the near-term impact on profitability from Kuiper should be "modest." That helps Amazon's outlook heading into its third quarter earnings report on Oct. 31.
"We think the risk/reward is attractive heading into results as investor expectations for (second half) profitability have moderated, Amazon Web Services growth continues to accelerate, and advertising momentum is building into 2025," he wrote.
Wedbush rates Amazon stock as outperform.
Some Amazon Stock Analysts Are Bullish On Kuiper
Some analysts are bullish on Kuiper's overall prospects. Mark Mahaney at Evercore ISI wrote recently that Kuiper has a chance to become Amazon's "fourth pillar." The designation refers to a long-described goal from Amazon to launch a fourth massive business. Its three existing "pillars" are its online marketplace, its Amazon Web Services cloud business and Amazon Prime subscriptions.
"While 'rocket risks' are real here, Kuiper is NOT the metaverse," Mahaney wrote in a note, referring to Meta's expensive and so far deeply unprofitable push into augmented-reality and virtual-reality products.
Mahaney noted that Starlink will generate an estimated $6.6 billion to $10 billion in revenue in 2024 and is profitable. That suggests an "attractive market opportunity" for Amazon.
Kuiper could also increase the value of a Prime membership if it is bundled with other services, Mahaney wrote. Also, it could lead to more e-commerce transactions if it helps bring more people online globally.
Rounding Error?
Other analysts are more neutral on the idea and what it will mean for Amazon stock. Pivotal Research Group analyst Jeffrey Wlodarczak recently published an initiation report on Amazon stock that was bullish overall on the tech giant. The report lists Project Kuiper as a risk factor for the analyst's bullish thesis, however.
"It will likely be quite difficult to generate a reasonable (return on invested capital) on (the $10 billion-plus) Kuiper satellite internet project, and the cost is likely to rise materially (to $20 billion-plus) if they want to compete with SpaceX's Starlink," Wlodarczak wrote.
But, he added, "even if Kuiper ends up costing $20 billion, and pressures margins somewhat for the next 18 months, it needs to be taken in the context of the (roughly) $125 billion in cash and marketable securities we expect the company to end 2024 with (and) the firm's nearly $2 trillion market cap."
"Kuiper," Wlodarczak concluded, "is a rounding error."
On the stock market today, Amazon stock traded sideways, down a fraction at 187.30 in recent action.
Amazon stock has formed a long consolidation pattern with a 201.20 buy point, according to IBD MarketSurge.
