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

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 consistent positive revision story, but we believe factors pressure revisions in the near term," he wrote in a note Monday.

Challenges facing Amazon include rising competition from Walmart (WMT), moderating contribution from its ad business to operating income, and high costs linked to its satellite broadband project.

"Keeping these headwinds in context, Amazon remains a margin expansion story, just 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 popular stock, Bloomberg data show. He sees shares priced at $187 over the next year. Meanwhile, Wall Street analysts see Amazon stock rising over 20% to about $220, according to Bloomberg consensus estimates.

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

Amazon is part of the so-called Magnificent Seven tech stocks that have posted massive gains over the past year thanks to investor hype over generative artificial intelligence. Amazon stock is up 42% from last year.

The rapid expansion of Amazon Web Services has mirrored the AI trend. Amazon’s AWS segment has launched a host of AI tools for developers and consumers over the past year. AWS is making more money renting space in its far-off data centers to customers looking to power hungry AI software. Amazon expects AI to generate billions of dollars of revenue in the coming years. But Wells Fargo thinks advancements in the AI space won’t be enough to offset downsides from Amazon’s other businesses, which could hinder its profit growth.

Wells Fargo’s Gawrelski said rising competition from Walmart’s burgeoning fulfillment services business will put pressure on the fees Amazon can charge merchants for storing, packing, and shipping their products. Gawrelski noted that Walmart’s fulfillment offerings for sellers are about 15% cheaper. If Amazon is forced to lower its fees, that would cut into its income from its retail segment.

Meanwhile, Amazon’s Project Kuiper, its initiative to become a satellite broadband internet service provider and rival to SpaceX’s Starlink, will shave $3 billion off its operating income in 2025 and 2026, Gawrelski estimated. He added that Amazon’s advertising 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 beating expectations in the third quarter. The company raised its third quarter outlook for Amazon’s earnings per share 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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