Wells Fargo has upgraded Amazon's stock rating to "overweight," equivalent to a buy recommendation. The financial services firm cited growing confidence that the company's cloud computing division, Amazon Web Services (AWS), is positioned for significant revenue growth driven by its investments in generative artificial intelligence.
Key Takeaways
- Wells Fargo upgraded Amazon (AMZN) stock from "equal-weight" to "overweight," setting a new price target of $280.
- The upgrade is based on expected revenue acceleration for Amazon Web Services (AWS), fueled by generative AI.
- Amazon's multi-billion dollar investment in AI company Anthropic is seen as a key driver for future cloud growth.
- The analyst projects AWS revenue will grow 22% in 2026, surpassing the current Wall Street consensus of 18%.
Wells Fargo Reverses Stance on Amazon Stock
Analyst Ken Gawrelski of Wells Fargo announced the revised outlook for Amazon on Wednesday, signaling a significant shift in the firm's perspective. The stock's rating was moved to "overweight" from a previous "equal-weight" position. This change reflects a renewed belief in the company's near-term growth trajectory.
In conjunction with the upgrade, Gawrelski established a new price target of $280 for Amazon shares. The decision marks a turnaround from a downgrade issued by Wells Fargo last October. At that time, the firm expressed concerns that heavy investments into Project Kuiper, Amazon's satellite internet initiative, could negatively affect the profitability of its retail division.
However, the latest analysis suggests these concerns have lessened. Gawrelski noted that Amazon's retail revenue and profit margins have remained strong, even with ongoing investments in Project Kuiper and adjustments to its Fulfilled by Amazon (FBA) fee structure.
The AI Catalyst Driving Cloud Growth
The primary factor behind the optimistic forecast is the anticipated performance of Amazon Web Services, the company's highly profitable cloud division. Wells Fargo's analysis points to generative AI as a major catalyst that will accelerate AWS revenue through 2026.
Amazon's Strategic AI Partnership
In September 2023, Amazon announced a major strategic move with an initial $4 billion investment into Anthropic, an AI startup known for its chatbot, Claude. This model is a direct competitor to OpenAI's ChatGPT and Google's Gemini. The partnership provides Anthropic with the necessary cloud infrastructure from AWS to train and deploy its advanced AI models.
This collaboration extends beyond simple investment. The two companies are jointly developing an AI supercomputer, known as Project Rainer. According to Gawrelski, this project, combined with broader expansions in data center capacity, will be instrumental in driving AWS growth in the coming years.
"We have increased conviction in AWS revenue acceleration following a detailed Anthropic contribution and cloud market analysis," Gawrelski wrote in a note to clients.
Projected Revenue Growth
Based on this analysis, Wells Fargo forecasts that AWS revenue will increase by 22% year-over-year in 2026. This projection is notably more optimistic than the current Wall Street consensus, which anticipates 18% growth for the same period.
Addressing Market Underperformance
The upgrade comes at a time when Amazon's stock has shown lackluster performance compared to its peers. Year-to-date, the company's shares have risen by less than 1%, making it the weakest performer among the group of technology giants known as the "Magnificent Seven."
Investor sentiment has been weighed down by several factors. Earlier in the year, concerns about potential tariffs impacting Amazon's vast e-commerce operations created uncertainty. More recently, the focus has shifted to the competitive landscape in cloud computing.
Rivals such as Microsoft and Google have demonstrated strong growth in their cloud divisions, largely attributed to their AI offerings. Following Amazon's second-quarter earnings report in July, its stock fell by 8%. The report showed only a modest acceleration in cloud revenue, which disappointed investors who saw competitors gaining ground in the crucial AI infrastructure market.
Future Outlook for AWS Market Share
The perception that AWS was losing its dominant market position has been a significant drag on the stock. However, the Wells Fargo report suggests this trend may be temporary. Gawrelski anticipates that any market share losses for AWS will likely peak this year.
The analysis projects a reversal of this trend, with stronger performance expected by 2026 as the benefits of its AI investments, particularly with Anthropic, become more apparent. The report concludes that a clear acceleration in AWS revenue is the most critical factor needed to reverse the stock's underperformance.
As of the market close on Wednesday, Amazon stock traded at $220.21. The new $280 price target from Wells Fargo suggests a potential upside of over 27% from its current level, indicating a strong belief in the company's ability to capitalize on the next wave of AI-driven cloud computing demand.
