Morgan Stanley analysts have dropped Amazon from their top pick list, following a "disappointing" second-quarter report. Morgan Stanley still holds a bullish overweight call for the e-commerce giant's shares, but analysts lowered their price target for Amazon stock to 210 from 240.
Amazon stock fell 9% on Friday after the e-commerce giant reported second-quarter results late Thursday. Revenue missed expectations, and the report included a lighter-than-expected sales outlook for the current quarter. Amazon executives told analysts that consumers are watching their spending and "trading down" on costs where possible. The Morgan Stanley analysts called the results "disappointing and multi-faceted."
Amazon's cloud business beat expectations for the quarter. But Morgan Stanley cited concerns with the company's retail operations.
"Big picture, the mix shift toward lower average selling price and lower margin items (due to both Amazon's heavy consumables and everyday essentials focus, as well as consumer trade-down/mix), combined with a slower than expected ramp in high-margin advertising and cost to serve improvements is weighing on profits more than we thought," Morgan Stanley analysts, led by Brian Nowak, wrote in a client note Tuesday.
Amazon Stock: Retail Profits Watch
Nowak is among several analysts that are bullish overall on Amazon's ability to expand its retail margins. For his three years on the job, Chief Executive Andy Jassy has focused on improving Amazon's efficiency in delivering products to customers, measured by a metric known as cost to serve. Meanwhile, Amazon's advertising business has been growing rapidly. That gives the retail operation a source of high-margin revenue.
Long term, Morgan Stanley expects that improvements in cost-to-serve and the ad business will help offset the impact as Amazon begins selling more low-margin essential items such as grocery products.
"But we were wrong about the slope of these improvements as near-term fulfillment costs are likely to be higher than expected due to continued adjustments in inventory," Nowak wrote Tuesday.
Plus, Amazon's ad revenue growth was slower than expected in the second quarter. Ads on Amazon Prime Video are scaling "slower than expected," the analyst said.
Amazon's recent slide has left the stock with a valuation to its earnings that is "not demanding," the Morgan Stanley note said
"But in our view Amazon needs to demonstrate an ability to deliver growth and profitability ... even as its product mix continues to shift toward lower margin items," Nowak added.
Amazon Stock's Relative Strength Dips
On the stock market today, Amazon stock is up 1.4% at 163.26. Shares slipped 4% Monday amid a broader tech sell-off. Amazon stock has fallen nearly 20% from a high of 201.20 reached early last month.
Overall, analysts have stuck with their bullish calls for Amazon following its Q2 letdown. Of the 67 analysts following Amazon stock, 94% hold a buy rating, according to FactSet.
With its recent slide, Amazon stock now has a weak IBD Composite Rating of 63 out of a best-possible 99, according to IBD Stock Checkup. The score combines five separate proprietary ratings into one rating. The best growth stocks have a Composite Rating of 90 or better.
Further, Amazon's IBD Relative Strength Rating is 40 out of 99. The RS Rating puts Amazon's 12-month performance in the bottom half of all stocks in IBD's database.
