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Amazon earnings look ahead

The steady rise of Amazon goes on; so what should investors be looking out for in its earnings report?

Amazon chief presenting
Source: Bloomberg

The shares recently hit an all-time high, up 9.3% for the year so far. Every time earnings season rolls around, Amazon doubters proclaim the wheels will finally come off Jeff Bezos’s titan, and yet it rumbles on.

First-quarter sales rose 28% to $29 billion, while operating income surged 330% to $1.1 billion. Much of this is down to the fact that Amazon’s own products, such as its Kindle, are the top sellers on its own websites. The margins on these products are stronger than on other firms’ products, producing a virtuous circle.

For the second-quarter, the firm is expected to see growth of 146% year-on-year in adjusted earnings per share (EPS), which are forecast to rise to $2.73. Revenue is forecast to be $29.55 billion, up 27%, while net income on an adjusted basis rises 149% to $1.14 billion.

Q1 2016 marked a welcome return to Amazon beating estimates, after an unexpected miss for the final three months of 2015. The ongoing expansion of membership of the Amazon Prime service, with the recent ‘Prime Day’ helping to raise the profile of the service, will likely help to drive an improvement in earnings. One other key area to watch will be Amazon Web Services (AWS), its cloud platform. AWS has continued to expand ahead of other providers, with its use in the financial sector growing rapidly. AWS revenues have been forecast to grow by 53% by Deutsche Bank analysts, to $2.8 billion.

Shares in Amazon have rallied 56% since the February low, which proved (with the benefit of hindsight) to have been a wonderful ‘buy on weakness’ opportunity. However, with the trend having reasserted itself in the first four months of the year, through the combination of furious dip-buying and a new ‘golden cross’ on the daily chart (where the 50-day simple moving average crosses over the 200-day SMA), it looks like we could see more gains in the longer-term.

For now, it might be best to wait for some of the momentum to come out of the share price. While another dip like February may not be likely, investors looking to keep riding this great trend might want to wait for stochastics to head to oversold levels, rather than chasing the price at levels that (on the daily stochastic) might be regarded as pushing overbought levels.

Nonetheless, from a seasonality perspective, Amazon stock may continue to gain into the end of the year. The record of the past ten years shows that Amazon stock enjoys positive months in all but the first two months of the year. The trading in 2015 may be instructive – having rallied into July earnings, the stock then slumped over the next month, before beginning to turn higher at the end of August. Once the excitement of earnings has settled down, the attraction of Amazon stock may be too hard to ignore for the broader market. 

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