Shares of Amazon (AMZN) closed 3% lower on Monday as Wells Fargo (WFC) analysts downgraded the stock, noting that the company’s strength in the cloud services market won’t be enough to fend off other hurdles to profit margins turn.

Wells Fargo analyst Ken Gawrelski downgraded the stock from Overweight to Equal Weight and lowered his price target for the stock from $225 to $183.

“AMZN has been a consistently positive revision story, but we believe factors are putting pressure on revisions in the near term,” he wrote in a note on Monday.

Challenges facing Amazon include increasing competition from Walmart (WMT), the moderating contribution of its advertising business to the bottom line and the high costs associated with its satellite broadband project.

“Keeping these headwinds in context, Amazon remains a margin expansion story, likely a more moderate margin expansion pace than the market expects,” Gawrelski wrote.

Gawrelski is one of only five Wall Street analysts who don’t recommend buying the hot stocks, Bloomberg data shows. He expects the shares to cost $187 in the coming year. Meanwhile, Wall Street analysts see Amazon’s shares rising more than 20% to around $220, according to Bloomberg consensus estimates.

Amazon’s most recent earnings report from early August fell short of Wall Street forecasts. But the strength of its cloud services division, Amazon Web Services, has helped make up for weaker-than-expected retail sales growth. AWS houses Amazon’s AI services and generated $26.3 billion in revenue during the company’s second fiscal quarter, exceeding analyst forecasts and up 19% from the year before. The advertising segment also saw revenue increase 20%, but reported revenue of $12.8 billion for the three months ended June 30 fell just short of expectations.

Amazon is part of the so-called Magnificent Seven technology stocks that have posted huge gains over the past year thanks to investor hype about generative artificial intelligence. Amazon shares are up 42% year-over-year.

The rapid expansion of Amazon Web Services reflects the AI ​​trend. Amazon’s AWS segment has launched a host of AI tools for developers and consumers over the past year. AWS makes more money by renting out space in its remote data centers to customers looking to power hungry AI software. Amazon expects AI to generate billions of dollars in revenue in the coming years. But Wells Fargo thinks advances in AI won’t be enough to offset the disadvantages of Amazon’s other businesses, which could hinder profit growth.

Wells Fargo’s Gawrelski said increasing competition from Walmart’s fast-growing fulfillment services business will put pressure on the fees Amazon can charge sellers to store, package and ship their products. Gawrelski noted that Walmart’s fulfillment offering for sellers is about 15% cheaper. If Amazon is forced to cut its rates, it would hurt revenues from its retail segment.

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Meanwhile, Amazon’s Project Kuiper, its initiative to become a satellite broadband internet provider and compete with SpaceX’s Starlink, will shave $3 billion from its operating revenue in 2025 and 2026, Gawrelski estimates. He added that Amazon’s ad sales will grow at a “much more modest pace” between 2025 and 2027.

Also on Monday, a judge ruled that the Federal Trade Commission’s antitrust case against Amazon will move forward.

Wells Fargo sees Amazon exceeding expectations in the third quarter. The company raised its third-quarter earnings per share outlook for Amazon from $1.18 to $1.26, well above the consensus estimate of $1.15, according to Bloomberg data.

Laura Bratton is a reporter for Yahoo Finance.

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