Wall Street Reacts to Mixed Amazon Results and Downgrade of Morgan Stanley
The stock market saw mixed signals on Friday, with analysts reacting to both positive and negative developments. While Amazon’s mixed second-quarter results and disappointing guidance sent its shares tumbling, analysts remain optimistic about the company’s long-term prospects, particularly its cloud computing arm, Amazon Web Services (AWS). On the other hand, Wells Fargo downgraded Morgan Stanley citing concerns about the bank’s wealth management business.
Key Takeaways:
- Amazon’s mixed results: While Amazon beat earnings estimates, it fell short on revenue and provided a disappointing forecast. This prompted a near-9% drop in the company’s stock price in premarket trading.
- AWS remains a bright spot: Despite the overall mixed results, analysts are encouraged by the strong performance of AWS, which saw a 19% growth in revenue, exceeding expectations. This growth is seen as a positive indicator for the segment’s potential in the emerging generative AI ecosystem.
- Morgan Stanley downgraded: Wells Fargo downgraded Morgan Stanley to underweight from equal weight, citing concerns over the bank’s wealth management business. This decision was driven by the deceleration in the business’s growth, leading to a "industry leading valuation seems to ignore deceleration of growth", according to analyst Mike Mayo.
Positive Outlook for Amazon’s Future
Despite the disappointing guidance, several analysts remain bullish about Amazon’s long-term potential, recognizing the strength of its AWS business and its strong operating income and free-cash-flow growth. They view the recent sell-off as a buying opportunity.
Evercore ISI’s Mark Mahaney, for instance, highlighted the potential for AWS growth to accelerate to 20% year-over-year, driven by gains in Prime Video Ads. He maintained his $225 price target, suggesting a potential 22% upside from Thursday’s close.
Bernstein’s Mark Shmulik trimmed his price target by $5 to $210 a share, but still encouraged investors to use the sell-off as a buying opportunity. He emphasized the "healthy" operating income and free-cash-flow growth of Amazon’s core business, concluding that "Zoom out, Amazon is already living up to its potential".
Concerns About Morgan Stanley’s Wealth Management Business
Wells Fargo’s decision to downgrade Morgan Stanley stems from concerns about the bank’s wealth management business, which saw revenue growth of just 2% in the second quarter. This slow growth, coupled with high valuation, is a major concern for analysts.
Mike Mayo, the Wells Fargo analyst who downgraded the bank, highlighted the lack of benefit Morgan Stanley receives from a capital markets recovery in contrast to other players like Goldman Sachs, while simultaneously trading at a "significant valuation premium."
Further Concerns:
- The downgrade also cited downward pressure on net interest income and fee realization, negative flows in investment management, and accelerating insider sales.
- The high valuation concerns are particularly pronounced given the decline in growth in the bank’s "higher P/E businesses" that historically drove re-rating.
Conclusion
The mixed signals from Wall Street highlight the dynamic nature of the market, with both favorable and unfavorable developments impacting various stocks. While Amazon faces an immediate challenge, its long-term potential remains strong, particularly due to the growth of its cloud computing business. Meanwhile, Morgan Stanley faces headwinds due to concerns about its wealth management business and high valuation.
As the market continues to navigate through economic uncertainties, it will be crucial to monitor the performance of key players like Amazon and Morgan Stanley, as well as the evolving sentiment of analysts.
