Nasdaq AMZN Amazon

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U.S. stock indexes were set to fall at the open on Tuesday, with investors fretting about the possibility of an economic recession as central banks across the world take aggressive actions to contain a surge in inflation.

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Tech stocks have been major victims of the broader market sell-off this year and the list includes e-commerce giant Amazon (NASDAQ: AMZN). Aside from macro headwinds, concerns about the slowing top-line growth and cost pressures have also weighed on the stock. Amazon stock has declined 34.3% year-to-date, and is trading at nearly a 42% discount to its 52-week high. With the Fed expected to continue to hike interest rates to tame rampant inflation, it will be tough for Amazon to stage a recovery. However, Wall Street analysts continue to be bullish on the company’s long-term prospects, especially on Amazon Web Services (AWS).

Financial Snapshot

Amazon expects its second-quarter net sales in the range of $116 billion to $121 billion, implying growth of 3% to 7%. This outlook reflects a potential slowdown from the 7% growth in the first quarter. After seeing extraordinary e-commerce demand spike in the early days of the pandemic, Amazon is feeling the impact of moderation in online shopping following the reopening of the economy. It is also facing higher fuel and labor costs, and supply chain issues.  

While, Amazon’s e-commerce sales are expected to be under pressure due to a slowdown in consumer spending triggered by high inflation, its AWS cloud computing business continues to look attractive.

In the first quarter, AWS sales surged 37% to $18.4 billion, while the division’s operating income grew 57% to $6.5 billion. The AWS division is poised to capture further business and bolster its position as more and more enterprises are moving their workload to the cloud.

Wall Street’s Take

Recently, UBS analyst Lloyd Walmsley slashed his price target for Amazon stock to $167 from $209, citing "some risks" to the financial outlook due to the current macro backdrop. While Walmsley lowered his revenue estimates for 2022 and 2023, his longer-term forecast remains upbeat.

Walmsley stated, “We see risk to the consensus revenue and operating income outlook near term, through for investors with longer-term time horizons, we think the current risk/reward looks compelling.”

Walmsley expects margins to improve in 2023 as the company brings down fulfillment and logistics capacity. He also anticipates Amazon to gain from the continued decline in COVID-related costs, as well as from benefits of Prime price hikes and the fuel surcharges.

The majority of other analysts covering Amazon stock are also bullish on the stock, with a Strong Buy consensus rating backed by 37 Buys versus one Hold. The average Amazon price target of $177.58 implies 62.08% upside potential from current levels.

Conclusion

Amazon’s dominant position in e-commerce, robust prospects for its highly profitable AWS business, and solid fundamentals have fueled Wall Street’s bullish stance on the stock. However, macro challenges might continue to weigh on the near-term performance.

On TipRanks Smart Score system, Amazon earns a nine out of 10, implying that the stock is likely to outperform the broader market.

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