Brent Thill from Jefferies discussed Amazon’s current challenges, including increased competition and declining profitability in its AWS segment, but maintains a bullish outlook with a buy rating and a price target of $225. He believes that the company’s tactical changes, particularly its focus on artificial intelligence, will lead to short-term lower margins but ultimately position Amazon for long-term success, emphasizing the importance of AWS growth as a key performance indicator.
In a recent discussion, Brent Thill from Jefferies provided insights into Amazon’s current market position and the challenges it faces. Following a downgrade from Wells Fargo, which cited increased competition from Walmart, Amazon’s shares dropped by 3%. Despite this, Jefferies maintains a bullish outlook on Amazon, holding a buy rating with a price target of $225. Thill emphasized that while there are concerns about competition and potential overspending in the cloud sector, he believes these factors are part of a tactical shift rather than a long-term decline.
Thill acknowledged that Amazon’s profitability, particularly from its Amazon Web Services (AWS) segment, is expected to decline in the latter half of the year. He noted that AWS has been a significant contributor to Amazon’s income, but the previously high margins of around 36-37% are unsustainable. As Amazon prepares for a major push into artificial intelligence and other investments, Thill suggested that the company is likely to experience lower margins temporarily, which could affect its stock performance.
The analyst pointed out that many hedge fund clients are currently short or underweight on Amazon due to the uncertainty surrounding its financial model. However, Thill believes that this period of lower margins may be short-lived, as Amazon’s leadership, particularly CEO Andy Jassy, is focused on maintaining cost discipline and operational improvements. He highlighted Jassy’s cautious approach to entering low-margin businesses, indicating a strategic mindset aimed at preserving high-margin operations.
Thill emphasized the importance of AWS growth as a key metric for investors to watch. He noted that AWS accounts for two-thirds of Amazon’s operating income, and any acceleration in its growth will be crucial for the company’s overall performance. He suggested that if AWS can sustain growth in the high teens to low twenties, it would be a positive sign for Amazon’s future.
In conclusion, while there are valid concerns regarding Amazon’s current challenges, Thill remains optimistic about the company’s long-term prospects. He believes that the tactical changes being implemented are necessary for adapting to the evolving market landscape, particularly with the rise of AI. Investors should focus on AWS growth and margin trends as critical indicators of Amazon’s performance in the coming quarters.