AWS Investors Should 'Stay Patient' On Amazon, Say Wall Street Analysts

According to Wall Street analysts, despite some weakness in Amazon Web Services, Amazon remains a buy.

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Amazon reported better-than-expected first-quarter revenue Thursday night, sending the online retail stock soaring. While the cloud business slowed during the quarter, management expressed concern over those gains at the conference call.

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CFO Brian Olsavsky said that as a result of these difficult economic conditions in the first quarter, customers were continuing to evaluate ways to optimize their cloud spending, as expected. As a result of these optimizations, April revenue growth rates are approximately 500 basis points lower than those recorded in Q1 with respect to revenue growth.

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At the time of writing, Amazon's shares were down about 1% in premarket trading. It is still worth noting that this year, the stock has risen by 30%. 

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As a result, analysts remain confident that Amazon will outperform in the long term due to a continued rise in retail sales, however, they urge investors to "stay patient" when it comes to AWS and to look forward to the long-term potential in cloud computing. 

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"I have to admit, we don't know why the slowdown accelerated. Was it the financial situation of AWS, housing/mortgage exposure, client mix, or something else?” Morgan Stanley’s Brian Nowak said to clients on Friday that the best guess is that AWS’s SMB clients are slow to start optimization efforts. 

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“The growth for the summer months may seem uncertain, but we remind investors that 1) we think we're over halfway through our optimization headwinds; 2) we're going to start to mathematically lap them in August and September; and 3) we're confident that AWS will be able to take advantage of this $2.5 trillion global public cloud opportunity for a long time to come. It is important to be patient,” Nowak wrote. 

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In addition to a price target of $150, he reiterated the overweight rating. 

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Despite a "strong quarter across the board," Bank of America analyst Justin Post raised his price target to $139 from $135, saying Amazon's retail performance demonstrates a "bullish margin path." Amazon shares have risen by more than 26 percent since Thursday's closing price. 

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A Friday note from Post noted, "We're encouraged with retail progress and expect further share gains," while noting Amazon's investment cycle history suggests margin upside. “In our view, Azure may receive a near-term AI boost (but this won't last longer than 2023) whereas AWS's exposure to fintech and other start-ups may have negatively impacted April." 

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A December price target of $145 was raised by Doug Anmuth at JPMorgan Chase, implying the stock could rise another 32%. Amazon's cloud business is doing well, despite the discouraging AWS print, according to Anmuth. AWS will soon hit a trough, according to him.

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“Aftermarket gains as high as 12% last night were reversed by a deceleration in revenue of 16% in 1Q to 11% in April. The 16% decel was much bigger than the 11%, and it matches what Microsoft indicated for Azure a few nights ago about Azure. Taking a step back from that single comment and looking at the very near-term dynamics, we think Amazon posted positive results and had many positive things to say,” Anmuth wrote Friday. 

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“In addition to AWS customers optimizing, we believe AWS will lap some of these effects in the second quarter, and AWS' position in Generative AI/LLMs will grow stronger in the third quarter," Anmuth concluded. 

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The price target on Amazon has been raised to $165 from $145 by Goldman Sachs' Eric Sheridan, implying a 50% upside from Thursday's close.

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Amazon's retail store shouldn't be eclipsed by the market focus on AWS.  

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He said that investors should focus their attention on what increasingly looks to be a long-term margin story for Amazon that is a much more substantial driver of stock price compounding. 

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