Source: PaxForex Premium Analytics Portal, Fundamental Insight
Technology investors are likely feeling anxious as second-quarter earnings reports approach.
The tech sector has performed well in 2024, driven by the ongoing enthusiasm for artificial intelligence (AI). However, there are concerns that some of the anticipated growth from AI may already be factored into current valuations.
Amazon is a stock to watch closely. Despite a 20% increase in its share price this year, Amazon's stock has declined approximately 7% in July.
With earnings scheduled for release on August 1, there is speculation about whether this presents a buying opportunity for Amazon shares.
Examining what investors should watch for in the Q2 earnings report will help determine if now is an opportune time to invest in Amazon.
One of Amazon's most crucial segments is its cloud-computing platform, AWS, which competes intensely with Microsoft's Azure and Alphabet's Google Cloud Platform.
In recent years, cloud infrastructure has been significantly boosted by artificial intelligence (AI). Microsoft's high-profile $10 billion investment in OpenAI, the creator of ChatGPT, and its swift integration of the technology into the Azure suite set a notable precedent.
Amazon responded by investing $4 billion in the AI startup Anthropic, positioning itself to capitalize on the growing AI market.
While these AI investments generate excitement, the real focus for investors should be on their impact on business performance. AWS, after experiencing several quarters of decelerating or stagnant growth, saw revenue acceleration in Q1.
This is promising, but Wall Street's expectations remain high. During the Q2 earnings call on August 1, Amazon's management will likely face questions about AWS's future, particularly how the Anthropic investment is driving growth and whether sustained revenue acceleration is achievable.
While the performance of AWS is of great interest, long-term investors should focus more on Amazon's underlying capital resources. Over the past year, the company has seen an 82% increase in operating cash flow, with free cash flow transitioning from significant losses to positive growth.
Amazon has also invested heavily in generative AI, data centers, and the development of its own semiconductor chips. Although it's too early to expect substantial growth from these projects, keeping an eye on the company's capital allocation efforts is crucial. This monitoring helps validate whether Amazon's management is making strategic and prudent decisions.
Amazon shares have declined during July. This downward trend can sometimes result from brief buying or selling activity around earnings calls, often due to information leaks or heightened skepticism. However, this doesn't seem to be the case for Amazon's current sell-off.
The recent price action appears to be primarily influenced by a series of stock sales by Amazon founder and former CEO, Jeff Bezos. Stock sales by founders are common, and despite these sales, Bezos still holds a substantial position in Amazon, so there's no cause for alarm.
This decline presents a potential buying opportunity. Amazon is showing signs of returning to growth in its core cloud business, and its cash-flow positions remain robust. However, it is wise not to rush into the stock. Adopting a long-term perspective and using a dollar-cost averaging strategy over several years is advisable.
Whether to buy shares before August 1 is less significant in the grand scheme. If there's long-term confidence in Amazon's business and the company continues to generate strong financial results, regularly buying shares over a long-term horizon can be a profitable strategy, regardless of the specific timing.
As long as the price is above 180.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 185.44
- Take Profit 1: 190.00
- Take Profit 2: 195.00
Alternative scenario:
If the level of 180.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 180.00
- Take Profit 1: 175.00
- Take Profit 2: 170.00
