Amazon just gave us 3 reasons to expect fresh highs

Key Points

• The e-commerce and cloud computing giant comfortably beat analyst expectations last week. 
• Diving deeper, the fundamental picture is clearly a lot stronger than investors were imaging. 
• The technical setup is also bullish, which supports the case for imminent gains.

Having endured a horrendous 2022, shares of Amazon.com, Inc. NASDAQ: AMZN have been working hard to turn things around this year. Through the middle of September, they’d rallied 80% and were less than a 30% move from their 2021 all-time high. Knowing Amazon, and its ability to launch gravity defying rallies, this felt quite achievable. 

However, the bulls ran out of steam around the middle of September and with the wider equity market starting to soften as well, shares dropped 20% through Thursday of last week. There the selling stopped though, with the company’s Q3 earnings catching investors by surprise in the best way possible. Amazon shares gapped up as much as 9% on Friday and took most of those gains going into the weekend. Here are three key takeaways that support a move back to highs. 

Strong headline beats

First up are the key fundamental numbers, two of the most closely watched metrics out there, revenue and earnings. These headline figures came in well ahead of analyst expectations last week, which is exactly what investors would have been hoping for. Given how soft shares had been trading in the previous weeks, it was looking like the market was losing confidence in Amazon’s ability to deliver a beat. 

Instead, their earnings per share came in a full 56% ahead of the consensus, while revenue for the quarter was up 12% year on year. It was a far cry from the 20%, 30% and 40% growth rates of years gone by, but it still meant the company’s second-highest revenue print of all time, second only to last year’s Q4. With the crucial holiday season fast approaching, things are on track for Amazon to deliver another record quarter this time around. 

Beating analyst expectations on the headline numbers is almost a prerequisite when it comes to enabling shares to rally in the aftermath of a report. Considering the recent dip, Wall Street’s going to have to scramble to re-price shares as the worst case scenario clearly didn’t come to pass. For those of us on the sidelines, that means we can expect a lot more days like Friday in the coming weeks. 

Robust metrics and growth

Beyond the headline numbers, the good news continued. Amazon’s operating income, especially for North America, continued to surge and was up for the sixth quarter in a row. Operating income from the company’s AWS business also performed well. Considering investors are continuing to focus on this as a key driver for the company’s longer-term growth, you can be sure this will drive fresh volume to the long side. There are some concerns about this unit’s pace of growth, but the key takeaway from last week’s report seemed to be that any recent deceleration has been stabilized.

This will have been helped by the company’s continued innovation around generative AI, which is arguably making AWS one of the most attractive cloud computing platforms out there.

Other parts of the business were also impressed, with the company’s Advertising unit in particular, delivering strong revenue growth that helped assuage any raised eyebrows regarding forward guidance that was just about in line with expectations. 

Attractive technical setup

So with the fundamentals all trending in the right direction and having given investors the best kind of surprise, we also have an attractive technical setup underpinning shares. While it’s true Amazon stock had been selling for the past month and had broken its 2023 uptrend; it shouldn’t take too much work to get this back together.

Since January, the rally had been characterized by a series of higher highs and higher lows, which together form a particularly strong foundation for a stock’s move north.

The higher lows tell investors there’s a constant source of buyers willing to take advantage of any dip, while the higher highs reinforce the continuously improving outlook and raise expectations. At the same time, the traffic isn’t all one way, which means there’s plenty of down days that stops the stock from becoming dangerously overbought.

In fact, if anything, with a Relative Strength Index (RSI) of just 48, in tandem with a MACD that is on the verge of turning bullish, there’s a strong argument to be made that Amazon shares are still quite cheap. 

Don’t expect this to last forever, as there are more than enough tailwinds to drive shares back to, and most likely beyond, September’s high before too long.