Amazon: Why Analysts Think It's a Solid Buy Ahead of Earnings

Key Points

• Amazon shares show strong upward momentum with sustained gains.
• Analysts predict up to 40% upside from current levels.
• Positive fundamentals and market conditions suggest more upside.

Shares of Amazon.com Inc NASDAQ: AMZN have had a funny kind of a year. After a strong rally through April, the stock saw some considerable volatility over the summer. Now, while it's back trading at April's levels, despite hitting an all time high in July, it has been rallying since August. Amazon shares are up nearly 25% since then, and, as they head into next week's earnings report, are just 8% away from their all-time high at $200.

With a $2 trillion market cap, the Seattle-based tech giant continues to lead in the e-commerce and cloud computing markets. As we'll see below, expectations are overwhelmingly bullish for Amazon's prospects, and there are several reasons to consider Amazon a solid buy, no matter next week's results. Let's jump in and see why. 

Consistent Fundamental Performance

To start with, there's the company's ability to land consistent earnings beats. August's report saw Amazon continue what's turning into a great looking track record by smashing analysts expectations and delivering its third-highest revenue print ever.

Amazon's profitability has also gone from strength to strength, with August's report marking its highest EPS in three years. Next week's earnings look set to continue this momentum, with the potential for a record revenue print that could top last year's $170 billion. 

Bullish Analyst Updates

Beyond the strength of Amazon's fundamental performance which underpins everything, many analysts have come out bullish on Amazon's stock, and almost all are calling for significant upside in its shares.

Just this week, the team over at Needham & Company reiterated their Buy rating, building on similar positions from the likes of Loop Capital, JMP Securities, and Evercore ISI earlier this month. Out of nearly a dozen analyst updates in October alone, all but one rated Amazon a Buy, setting it apart from other tech stocks as having one of the most overwhelmingly bullish analyst consensuses we've seen. 

The main recurring theme from the various updates on the stock is that Amazon's recent underperformance against the broader market has created a golden entry opportunity. There's a sense that ahead of next week's report, the risk/reward profile is almost too good to be true. Take JMP Securities' price target of $265, for example, which is pointing to a targeted upside of more than 40% from current levels. That's an astonishing outlook for a $2 trillion stock, and needless to say would have Amazon shares trading at fresh all-time highs. 

Potential Concerns

Despite the bullish sentiment, investors should keep some concerns in mind. Amazon's price-to-earnings (PE) ratio of 44 may look a little frothy, especially compared to fellow tech giants like Alphabet Inc's NASDAQ: GOOGL of 23, Meta Platforms Inc's NASDAQ: META of 29, and even Apple Inc's NASDAQ: AAPL of 35. 

This higher valuation could give some investors pause, particularly when Amazon's stock has struggled to reclaim all-time highs despite the benchmark S&P 500 index hitting highs since September.

Furthermore, while many analysts are bullish, there's a cautious note from Wells Fargo, who went so far as to downgrade Amazon from Overweight to Equal Weight earlier this month, citing valuation concerns. Even with this more cautious stance, however, the stock's upward trend remains intact, supported by consistent growth and strategic positioning in AI and cloud services. 

Getting Involved

The final piece of the puzzle supporting the bull's case for Amazon is the bullish technical setup. The stock's current relative strength index (RSI) is at 46, a level that indicates there's still significant room for the stock to move higher. For context, the RSI is a popular technical indicator measuring momentum, with readings above 70 suggesting a stock is extremely overbought and readings below 30 suggesting it's extremely oversold. 

With Amazon's RSI closer to the latter figure, you can't help but feel we could be looking at the mother of all entry opportunities. While there's always a risk associated with buying into a stock ahead of its earnings report, it would take a monumental surprise to counter the overwhelmingly bullish momentum and outlook surrounding the stock right now.