Amazon comes to a boil; complete price reversal in sight

Key Points

• Amazon has a blowout quarter with strength in all operating segments. 
• Analysts are leading the market into a reversal that could add double-digits to share prices this year. 
• The price action is on the brink of confirming a long-term head and shoulders pattern that could take the market to a new all-time high. 

Sluggish growth in the AWS segment or not, Amazon.com Inc. NASDAQ: AMZN is performing well in all segments, and its stock is poised to complete a total reversal. 

Amazon led the charge into the cloud more than two decades ago and had little serious competition until now. Now, Microsoft Inc. NASDAQ: MSFT is taking share in the cloud, but even still, its Intelligent Cloud business is on par with AWS regarding revenue, and AWS is still growing by double-digits. 

What is a reversal? A reversal is when the direction of price action changes, from up to down or down to up, and sometimes from down or up to sideways. Amazon shares hit a near-term bottom early this year, resulting in a change from down to sideways. The stock shows signs of completing a larger reversal, shifting the bias from sideways to up. 

Amazon has a Goldilocks quarter with improvement in all segments

Amazon had a solid quarter with growth and margin expansion in all segments. The net revenue of $143.1 billion is up 12.6% year-over-year (YOY), 11% on an FXN basis, with double-digit growth in all three operating segments. 

International led with a 16% advance, 11% FXN, with AWS up 12% and North America up 11%. Among the growth drivers is the shift to regional fulfillment centers, which CEO Andy Jassy says exceeds their optimistic expectations. Regarding AWS, the team is driving growth with a lean into generative AI, which Jassy says could be worth billions in annual revenue. 

The company also produced significant margin improvements in all segments. Margin improvements are driven by Jassy's cost-cutting efforts and revenue leverage, increasing GAAP earnings. The GAAP earnings of 94 cents include a $1.2 pre-tax gain relating to the valuation of Rivian shares, but even still, adjusting for that, earnings are up three times compared to last year and outpaced the consensus by a wide margin. More importantly, the company's free cash flow reversed to positive for the quarter, improving the balance sheet. 

The guidance is mixed but ultimately favorable to higher share prices. The revenue guidance of $160 to $167 billion for the fourth quarter is slightly below the Marketbeat.com consensus but offset by an expectation for margin strength to persist. Operating income should double at the range’s low end and triple at the high, and both top- and bottom-line targets could be cautious. The company has clear momentum, and the US consumer remains resilient. 

Analysts lead Amazon into reversal

The analysts have been leading this market into a reversal since early in the year. The consensus sentiment has held firm at Moderate Buy, with a price target rising since early Q2. The consensus price target of $165 assumes a 38% upside and should trend higher now that Q3 results are in.

The most recent targets are well above the consensus, suggesting greater upside potential, while the low target is just below the current price action, suggesting downside risk is limited. 

The institutional activity has also aided Amazon's price action over the last year. The institutions own only 57% of the stock but have been buying on balance over the previous four quarters. The inflows outpace outflows by 45%, consistent with the forming bottoming pattern. 

The price action in Amazon stock hit a long-term bottom early in 2023 and rebounded to today's price levels. That rebound is part of a larger head and shoulders pattern that may be confirmed soon. The post-release action has the stock up more than 6% in early trading, confirming support at the right shoulder; assuming the market follows through on this signal, the next hurdle is the pattern's neckline near $140. 

Because the analysts' consensus is $165 and rising, AMZN shares will have little trouble breaking the neckline. In this scenario, the market will likely gain momentum with a move above $140 and potentially surpass $165 on the way to retesting the all-time highs. Coincidentally, the weekly candle has a prominent and significantly large lower shadow, revealing solid support at the current price levels.