Amazon’s stock has been underperforming recently amid concerns that its cloud services arm, Amazon Web Services (AWS), is losing its competitive edge to rivals like Microsoft. However, Wells Fargo analysts, led by Ken Gawrelski, suggest this view may be overly pessimistic. In a recent report, Gawrelski upgraded Amazon’s stock rating, expressing increased confidence in the company’s potential to accelerate AWS revenue through strategic initiatives, including investments in AI.
A significant factor bolstering this optimism is Amazon’s partnership with Anthropic, the AI company behind the chatbot Claude. Amazon has committed $4 billion to Anthropic, aiming to enhance their AI capabilities. This collaboration is set to manifest in Project Rainier, an AI supercomputer initiative designed to strengthen Amazon’s cloud infrastructure. Gawrelski anticipates that such developments will lead AWS to see revenue growth of 22% by 2026, surpassing the current Wall Street expectation of 18%.
Despite previous concerns about the financial drain from Amazon’s Project Kuiper and pressure from the Fulfilled by Amazon service, Gawrelski remains confident in the robustness of Amazon’s retail revenue and margin growth. He has set a price target of $280 for Amazon’s stock, banking on AWS’s turnaround.
This increased investment focus comes amidst a backdrop of Amazon’s disappointing stock performance this year, lagging behind its peers in the group dubbed the Magnificent Seven. Concerns about the impact of tariffs and competitive pressures from other cloud service providers have dampened investor sentiment. Amazon’s stock saw an 8% drop following underwhelming second-quarter cloud revenue results.
Yet, with AI’s importance surging in the cloud market, the narrative that AWS could regain its momentum is gaining traction. Gawrelski argues that any AWS share losses are expected to crest this year, with stronger performance anticipated by 2026. This strategic pivot towards AI-driven growth indicates Amazon’s commitment to maintaining its leadership in the cloud sector.
With these strategic moves, Amazon aims to assuage fears of its cloud business being overshadowed by competitors, positioning AWS for long-term growth and helping to revive investor confidence in its stock. As the influence of AI continues to expand, Amazon’s investments in this area could prove pivotal in transforming its competitive standing.