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Amazon keeps Buy rating with Roth

Roth Capital Partners analyst Rohit Kulkarni is sticking with a “Buy” recommendation on Amazon (Amazon Stock Quote, Charts, News, Analysts, Financials NASDAQ:AMZN), saying in a Tuesday report to clients that the near-term picture for the company’s cloud computing segment AWS is likely to show slowing growth, while longer term the artificial intelligence boom should be good for AMZN.

Last month, Amazon announced another round of layoffs, citing uncertainty in the economy as the impetus. Amazon said it would be cutting about 9,000 jobs, which would be on top of the 18,000 culled in recent months as the company tries to streamline operations.

“The overriding tenet of our annual planning this year was to be leaner while doing so in a way that enables us to still invest robustly in the key long-term customer experiences that we believe can meaningfully improve customers’ lives and Amazon as a whole,” said CEO Andy Jassy in a March message to employees.

Kulkarni said the layoff notices as well as recent AWS-related industry conversations have provoked a tweaking in Roth’s model on Amazon. The analyst is figuring the layoffs will offset any incremental second half 2023 revenue softness, while his 2024 operational income figures went up by two per cent.

In total, Kulkarni dropped his full-year 2023 revenue estimate from $546,443 million to $543,780 million and his 2024 estimate from $598,873 million to $592,504 million. On EPS, 2023’s estimate went from $1.74 per share to $1.68 per share and 2024 went from $2.57 per share up to $2.63 per share.

“We believe there is additional Operational Income upside as AMZN has significant opportunities for efficiency improvements across Retail & Cloud, if revenue softness lingers, which could provide a pathway to more than six per cent Operational margins in 2024 (the Street is at approx. five per cent right now),” Kulkarni said.

As to AWS, Kulkarni has modelled 15 per cent and eight per cent year-over-year revenue growth for the segment in the first and second quarters of 2023, respectively, with AWS margins expected to drop to 22 per cent for the first half of the year, followed by steady and sequential improvement in revenue growth and margins over the second half.

“We believe SMB-led cloud usage/ price optimizations start lapping by 3Q ’23 whereas large business-led contract renegotiation might linger through the end of 2023, effectively putting extra pressure on AWS,” Kulkarni said.

On the AI industry, Kulkarni said AWS’s custom chips for AI model training and inference are a source of a unique moat compared to other companies, while developers have AWS’s full-stack AI on-ramp offering to build AI apps.

“We believe AI unlocks greater Cloud spend over the longer term with AWS positioned to gain market share in this incremental spend; however, ongoing price optimizations might offset near-term adoption,” Kulkarni wrote.

With the update, Kulkarni maintained a 12-month target price of $125.00, which at press time represented a projected return of 22.3 per cent.

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