Key Points
- Amazon's shares remain boxed in between $210 and $240, despite a solid year of fundamental performance.
- Next week's earnings will likely be the most significant catalyst of the quarter, and could ultimately decide if the uptrend resumes this side of the holidays.
- Analysts are still overwhelmingly bullish, but expectations are high as well.
Tech titan Amazon.com Inc. (NASDAQ: AMZN) heads into Thursday's earnings with plenty on the line. Recent weeks have seen the stock move more sluggishly than usual, and shares were trading around $225 on Friday, Oct. 24, still capped below the stubborn $240 ceiling that has halted every rally since February. When we warned of a triple top taking shape, the stock was down about 6% from its September peak.
Investors will be forgiven for getting nervous with the stock essentially flat for the year, especially as the S&P 500 notched a fresh record on the morning of Oct. 24. To be fair, the bulls did step in to defend $210 the week before, the same level they held in August, but without a pop from this week's earnings, the stock risks toppling over. So just what kind of report is needed to avoid this?
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Wall Street Expects More Than Just an Earnings Beat
First and foremost, Wall Street will seek proof that Amazon's three core growth engines, AWS, e-commerce, and advertising, are firing on all cylinders. After several steady quarters, expectations are high, and with a price-to-earnings ratio that's been rising steadily all year, the company must do more than simply meet analyst expectations.
The good news is that the sentiment is overwhelmingly bullish. Earlier this month, the team at Goldman Sachs reiterated its Buy rating and $275 price target, citing strength in AWS and renewed AI demand. And both Stifel and Wedbush reiterated their Buy ratings on Oct. 24, with price targets ranging to $280, implying a targeted upside of some 25% from current levels.
Those targets assume that AWS growth will accelerate and consumer spending will remain healthy, especially after October's Prime Day event. Strong post-event sales numbers would reassure investors that the recent uptick in inflation isn't spooking consumers and suggest they'll continue spending their way through the holidays.
Q4 guidance will also need to be confident. The holiday quarter is historically Amazon's biggest, and upbeat commentary from leadership would go a long way to restoring bullish momentum. However, with a valuation starting to look just a bit stretched, even a modest miss could reinforce fears that Amazon's rally has peaked.
Amazon Earnings Play: Aggressive vs. Cautious Approach
For investors, there are two obvious approaches ahead of earnings. The first is to buy now and bet on another Amazon earnings beat. The company has a multi-year streak of topping expectations, and more of the same this week should help fuel another leg higher.
For those on the sidelines considering this play, there's added support from the broader risk-on sentiment that is firmly in place, and the fact that the major indices are all at, or near, record levels.
The second, and more cautious approach, is to wait for confirmation. A clean breakout above $240 with substantial volume would confirm the bulls are back in control, and given how lackluster Amazon has been in recent weeks, waiting to see the proof may be the safer move.
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Amazon's Fundamentals Are Strong—But Is That Enough?
While there might be two obvious plays for getting long, it's hard to find a reason to bet against Amazon. It remains one of the strongest names in global tech, with unmatched scale and a healthy balance sheet. But great companies aren't always great trades. With the bulls lacking the control they've had for so long, this week's report will firmly test their conviction.
The fundamentals remain solid, there's steady growth across their core markets, and several long-term tailwinds are in place. However, "solid" might not be enough to justify another move higher, at least in the short term. For Amazon's rally to continue, and for the triple top to be firmly broken, this week's earnings report must be exceptional. If it is, a run toward $280 by the end of the year is likely. If not, the wait for a decisive breakout will continue.
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