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- R5 Capital downgraded Amazon’s stock from a “buy” to “sell” rating on Monday, citing concerns of slowing growth and smaller profit margins amid COVID-19.
- It’s a rare “sell” recommendation for Amazon among Wall Street analysts, as most remain bullish over the company’s stock.
- The bigger concern is that consumer spending could remain suppressed for a long period as the economic recovery is expected to take time, the note said.
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Wall Street has long been bullish about Amazon’s stock, helping to push the company’s market value up 30% this year alone to roughly $1.2 trillion.
But a rare recommendation to “sell” the stock emerged on Monday, just three days before the scheduled date for Amazon’s first-quarter earnings report.
R5 Capital wrote in a note published on Monday that it’s lowering its rating on Amazon to “sell” from “buy,” over concerns of slowing growth and higher expenses amid the coronavirus outbreak.
“With the stock, however, having appreciated meaningfully and reaching our $2,408 price target in the face of dramatically worsening current economic conditions and rising future uncertainty, we believe prudence dictates reducing exposure to the equity,” R5 Capital’s Scott Mushkin wrote in the note. “Indeed, if we had a concern regarding our outlook it would be that we are still being overly optimistic.”
The downgrade is an outlier among Wall Street analysts that mostly recommend buying Amazon’s stock at the current price. Of the 46 analysts that track Amazon’s stock, 43 have a buy rating and only 1 has a sell rating, according to FactSet.
R5 Capital’s report comes at a time when Amazon’s stock has outperformed the broader market by a huge margin as more people shop online to avoid physical stores out of COVID-19 concerns. Most investors believe Amazon is going to be the prime beneficiary of the coronavirus outbreak because of this shift to e-commerce.
R5 Capital noted that it still forecasts growth in Amazon’s overall business, but just not “at the heady levels prior to COVID-19.” In fact, it said all but one (physical stores) of Amazon’s key business segments will suffer slower growth and smaller margins than expected through 2021 as a result of the broader economic slowdown.
The bigger challenge, however, could be the weaker consumer spending following a prolonged economic recovery period that could stretch into 2021, the note said. That could also impact corporate spending on public cloud services, cutting into Amazon’s all-important cloud profitability.
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“More importantly, we assume the economic recovery will be challenging (significant unemployment must be overcome) and this will suppress consumer spending across various segments, as well as impact corporate expenditures in the cloud space and other areas,” the note said.