Bullish Forecasts And Catalysts To Watch

Remember when Amazon
AMZN
was just considered an online bookstore? Few folks had the foresight to see how the company would eventually go on to dominate the online consumer goods marketplace, but the ones that did have been richly rewarded. Amazon’s current business model is not as simple to grasp as it used to be, but it’s still straightforward so that any savvy investor can come to understand how the company operates enough to invest in it. Amazon’s “big tech” reputation can be a daunting hill to overcome, but after reading this article, investors should be better prepared to develop their own thesis going into the company’s earnings release this month. Let’s dive in.

Amazon Stock Key Considerations

Generally, Amazon’s financials are what you could expect out of a blue-chip incumbent in its respective industry. Net earnings were negative in recent releases, which is uncharacteristic of a blue chip, but it’s par for the course with Amazon just like the elevated valuation metrics it usually carries. However, there are at least a few key areas that investors will want to pay close attention to with this new set of financials. Remember to not only look at the literal numbers themselves, but also the notes that are attached to them in the official SEC filing. Here are a few metrics to examine once the release is out:

Amazon Web Services (AWS) contributions

AWS is one of the defining pillars of Amazon’s operations. The success of Amazon’s enterprise-level cloud platform is mainly driven by corporate spending drives rather than consumer-related activity, but broad macro factors like high interest rates can still play a factor in how companies negotiate their contracts with Amazon. Margins are much healthier in this segment compared to the other logistics-heavy segments, but investors should watch for any positive change between periods. Topline revenue growth is there in the first two quarters of 2023 (represented by a 14% increase from 2022), but operating expenses are also eating into a bigger chunk of the margin (24% versus 32% in 2022). A turnaround of this trend in the third quarter would be a bullish sign for both traders and longer-term investors.

Other income (expense), net

This number was impactful last year due to Amazon having to write down the value of its Rivian holdings to the tune of nearly $14 billion. The official 10-Q notes clarify the exact breakdown, but the lesson here is that investors should look to see if this P&L (profit and loss) line item has stabilized to a near-zero value in the third quarter and beyond.

Purchases of property and equipment

Amazon’s recent below-average financials have been partially attributed to investment in the company’s fulfillment infrastructure. Building out warehouses, managing routes and ensuring on-time delivery (among many other operational activities) doesn’t come cheap, so investors should monitor this cash flow line item to see whether the company is going to continue spending heavily on structural improvements or eventually wind down these investments. Last quarter, Amazon spent approximately $11.4 billion on PP&E (property, plant and equipment), a 27% decrease from the previous year’s total.

Momentum

While this isn’t an official filing-related metric, investors will want to watch how this technical indicator changes as the earnings release date gets closer and as it passes. Amazon stock’s current pricing is showing buy signals on most time frames (i.e. the stock is exhibiting bullish momentum), but investors will want to confirm broad market enthusiasm in the time following the release.

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Amazon’s Q2 2023 Earnings Results

Amazon’s previous earnings for the second quarter of 2023 were well-received. The company beat on both EPS and revenue, a marked improvement relative to previous years. Investors immediately pushed the share price up, which is visibly observable when looking at Amazon’s chart during that period. However, since then the share price has been somewhat stagnant, hovering above its August 3 price of $128.93 and going as far as $145 before walking back to around the $130 range. This suggests that traders still see Amazon as a reliable earnings play, and with as much volume as the company typically generates, this kind of post-earnings movement should be expected (especially on positive developments). For the third quarter, Amazon’s management has guided for between $138 billion and $143 billion in revenue. This would be an average of 11% growth compared to 2022, which is a modest assumption and one that would be in-line with the quarter over quarter growth so far. The 40-plus Wall Street analysts who cover Amazon are currently calling for a consensus ‘Buy’ rating, likely due to the company’s rapidly improving financials.

When Does Amazon Release Its Next Earnings?

According to Amazon’s website, its next earnings release is scheduled for October 26 after the market closes. The company will have a conference call at 5:30 ET. The majority of previous quarterly releases have been at 12:00 P.M. ET, which makes sense for a west coast company, although for the future, investors should note that the annual releases have happened at 11:00 A.M. ET. Amazon typically hosts their call as a webcast on the IR section of its website, although there are a few platforms where a transcript can be accessed after the call is finished.

Catalysts And AMZN Stock Earnings Forecast

Judging by its current fundamentals, Amazon’s trajectory looks like it will be more in line with the bull camp’s expectations rather than the bear camp. New leadership through Andy Jassy (elevated from AWS head to Amazon’s CEO), a cost-cutting program revolving around lowering headcount, and investment for improving the company’s bread-and-butter delivery operations all seem to be paying off in 2023. Amazon’s P/E is currently 105 at the time of writing, although recall that this metric is only useful as long as the company has positive earnings. Investors wouldn’t be wrong for adopting a bullish outlook, given this and other positive financial signs (like the company’s expanding margins).

However, if the overhang from major factors like geopolitical instability and economic uncertainty aren’t overcome, Amazon’s financials may falter again and its share price will languish alongside them. Legal woes could also bring down the stock, as Amazon recently received a major challenge from the FTC and several U.S. states related to alleged anticompetitive practices.

Since the pre-pandemic era, right around 2019, Amazon’s stock has established a support level near the $86 mark. For bears and investors looking to hedge, this would be the low point for the share price moving forward. For bulls, following the elevated levels that Amazon was trading during the height of the pandemic, it’s now trading along the multi-year upward trendline that’s been in place for the last decade. The peak of $182 during the summer of 2021 would be a plausible price target for the near future; based on the share price at the time of writing, investors would be looking at a 37.8% return if the share price continued climbing.

Possible upside catalysts include:

Meaningful update from management around artificial intelligence
Change to more dovish monetary policy
Further confirmation of cost savings and key operational improvements
Legal victories

Does Amazon Stock Usually Go Up After Earnings

Unfortunately, the answer is yes and no. We mentioned how Amazon’s share price jumped following the recent earnings release (ER), but this shouldn’t be seen as a norm. Likely, this movement could be explained by a number of textbook reasons such as traders performing a swing play or retail investors bidding up the share price. Both of these examples would be reasonable following a uniquely good ER (characterized by the large earnings beat) for any popular company, not just Amazon. However, even on just normal beats, Amazon’s post-earnings movement isn’t necessarily up. In fact, following the third-quarter 2022 release, Amazon’s share price was mired in sub-$100 territory for the first month of the year. Granted, it has recovered since then, but the point is that investors should consider other entry points rather than trying to play the earnings date, as recent history hasn’t shown a clear trend.

Bottom Line

As we approach Amazon’s earnings release date, interested investors may want to start preparing their dry powder for an entry. While it may be ill-advised to do so immediately following the event itself, the majority of Wall Street analysts covering this name are maintaining Buy ratings. Broader market sentiment around Amazon also appears to be on an uptick, as the share price is currently up around 3% for the month. What these two points indicate is that bulls could be in control of the share price’s movement for the foreseeable future. Bears aren’t likely to see any of their needed downside unless there’s a major disappointment with this ER, so they’ll want to look for another opportunity. Otherwise, management seems confident based on the last earnings call. Bullish investors may want to buy-in based on that confidence. But as always, do your own due diligence and never risk anything that you’re not willing to lose.