Amazon Earnings Preview: Prime to Buy or Sell?

Amazon stock is languishing at one-year lows ahead of fourth-quarter earnings. Is this a time to make an investment into Amazon’s massive cloud division (AWS) or to stay clear of its supply-chain disrupted delivery service?

Amazon delivers a volatile stock

Amazon was the darling of the lockdown stocks in 2020, but the stock's performance was lacklustre in 2021 and dire so far in 2022. AMZN has been among the most affected tech stocks in the wake of the expected rise in interest rates from the Fed. That isn't entirely unexpected, the retailer has a lofty P/E ratio of 58 and highly-valued stocks are getting hit hardest right now.

High valuations are natural for high growth industries. Analysts point to Amazon’s fastest-growing segment: AWS. Cloud computing continues to be a winner.

The details on AWS

Amazon Web Services (AWS) amounted to just 15% of the retail giant's revenues over the last quarter but accounted for 72% of its operating income. Although a small segment by revenue, it's the most significant profit component. Last quarter, AWS saw a 39% increase in revenue, although the underlying profitability was stable due to increased investment in the division. The web service had a major outage in December that might impact the numbers slightly.

Amazon recorded two quarters of decreasing EPS, with last quarter disappointing estimates. Analysts are now forecasting the company's EPS to come in at , but the focus is likely to be on the cloud division.

Another thing to note is that Q4 is relatively less important to Amazon than other retailers, mainly because consumers try to anticipate their online shopping. However, there is a chance for growth since the comparable quarter in the prior year had relatively weak performance in the middle of the covid surge before vaccines became available.

What's next for AMZN?

Amazon's stock price was 10% down from its peak when the SPX was at all-time highs at the beginning of January. AMZN has lost nearly 30% of its value since last November, down 20% in January alone.

If AMZN is to revisit its all-time highs, 3k and then 3,180 are key areas of resistance it must overcome. The hammer pattern on the weekly chart and recovering over 10% are a source of optimism for bulls.

Failing to recapture 3000/180 would be a source of concern. The potential downturn could take the price back to its 50-week moving average and under 2,500.

Source: SpreadEx trading platform

Key Takeaways

Fourth quarters are known to be less favourable for Amazon, and this may impact Amazon's EPS but the bigger picture is high growth cloud vs inflation-impacted deliveries.

Investors should pay more attention to AWS's underlying profitability and how fast the segment grows. If earnings show relative strength on these components, it could continue to attract dip-buyers.