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Amazon share price: what to look for in Q2 earnings

Despite some stomach-churning volatility in Amazon’s stock, the outlook for the firm remains strong, as its dominance in the retail space is complemented by its growth in cloud computing.

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When is Amazon’s earnings date?

Amazon reports earnings on 25 July, covering the fiscal quarter to the end of June 2019.

Amazon earnings: what does Wall Street expect?

Amazon is expected to report earnings of $8.16 per share, up 10.5% compared to a year earlier, while revenue rises 18% to $62.42 billion. It has beaten estimates in six of the last eight reports for both headline earnings and revenue.

In the space of 79 trading days in late 2018, Amazon stock fell 36%. This was the biggest decline since the February 2016 rout that wiped 30% off the stock price. In between these two cataclysms, the company’s stock rose 331%. At the time of the 2016 slump, it looked like the great rally in Amazon had come to an end. Those predictions seem very wrongheaded now. Now that the stock price has recovered almost all of its late-2018 fall, some might be wondering if Amazon’s stock can repeat the trick.

Forecasts for Amazon’s earnings have declined over the past three months. A 24% gain compared to a year earlier has been revised down to a much more modest 10.5%, which will help the stock to beat expectations. For many years, Amazon has been driven higher by revenue growth, with the ‘growth story’ element a far more powerful story than the growth in profitability. Like many tech firms, Amazon’s compelling story is based on its potential to grow in new areas and conquer new markets in a similar way to how it has achieved dominance in the US.

This dominance extends beyond shopping. While the name itself still conjures up the impression of an online shopping titan, its cloud computing arm is now a key growth driver. Amazon has managed to grow its cloud computing (Amazon Web Services or AWS) at a faster rate than that of rivals such as Microsoft, Google and IBM. While the online shopping division is still the more important element, cloud computing provides the crucial element of diversification.

At 47 times forward price-to-earnings (P/E) ratio, compared to previous years, Amazon is quite cheap. The forward P/E ratio hit a low of 36.6 at the end of 2018, and despite the 53% gain since the December low, the forward P/E ratio has barely budged. The current forward P/E ratio is more than one standard deviation from the five-year mean of 66, suggesting that expectations for Amazon’s future performance are relatively low.

How to trade Amazon’s earnings

At present, of 54 analysts covering the stock, 52 have ‘Buy’ recommendations, with one ‘Hold’ and one ‘Sell’. The current $22.53 target price is 12% higher from the current price of $20.11. It is important to note that the average move on results day is 4.8%, while current options pricing suggests a move of 4%.

Amazon stock price: technical analysis

We have seen the Amazon share price surge higher throughout this recent stock market rally, with the stock moving within touching distance of the $205 record highs. These major historical levels always allow for key reversal or breakout points, therefore, the ability or inability to break through that level will be crucial from here on in.

Amazon weekly chart
Amazon weekly chart

Source: ProRealTime

From a shorter-term perspective, it is worthwhile watching out for the $199.686 level as the company declines into a potential reversal signal. A break below that level would raise expectations of a pullback over the short term, as traders look at this major record high as a hurdle which may be too much right now.

A break below that level would point towards a short-term retracement of the rally from $187.00. With the Bollinger band coiling, there is reason to believe we are due a sharp jump in volatility. That could come about through either a rally through the prior peak or this current swing low. In any case, even if we did see a short-term pullback, it would be deemed a retracement before the market turns higher once more. Thus, a break below $187.00 would be required to negate the wider bullish trend for Amazon.

Amazon four-hour chart
Amazon four-hour chart

Source: ProRealTime

Bullish trend and strong fundamentals boost Amazon

The online retailer seems to have everything going for it. Strong growth, healthy profits, a low valuation (relative to history) and an extremely bullish chart suggest that this strong performer will remain an investor favourite. While it can be volatile, as the past year has shown, it does not look like Amazon has finished expanding yet.

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer.

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