Amazon.com will unveil its Q2 financial results on Thursday, August 3, after Wall Street’s closing bell. The world’s biggest online retailer is set to post solid figures as its aggressive expansion in a range of secondary sectors seems to be coming to fruition. Also, the e-commerce segment is expected to rebound despite global weakening consumer demand, while Amazon Web Services (AWS) will most likely continue exhibiting slowing growth. Lastly, investors may expect to hear some fresh Artificial Intelligence (AI) initiatives.

Good year

After a devastating 2022 in which Amazon’s share price lost around 50% of its value, the online retail giant has been in recovery mode so far in the year, capitalising on the AI-fuelled tech rally. However, there are also idiosyncratic factors behind the latest gains as the firms’ expansion and diversification efforts have started to pay back.

Undoubtedly, the slowing economy cast shadows over the firm’s e-commerce activity, which could be the main reason why Amazon is lagging against other tech behemoths in 2023. These fears could be shattered by the upcoming earnings call as the firm’s online retail segment is set to post its first positive print after two consecutive negative quarters.

Growth levers

As almost every tech company in the world, Amazon could not be left out from the AI mania. In this quarter, investors are anticipating to get some clues on the progress of the newly launched AWS Generative AI Innovation Center, which is expected to create new selling opportunities amid fading consumer spending.

As AI initiatives are still in embryonic stages, AWS continues to shoulder the burden. Amazon’s cloud segment is forecast to grow around 10% on an annual basis, extending its streak of consecutive quarters of slowing growth at six. However, AWS’ dominant position in the cloud market coupled with its wide profit margins could lead to significant gains when activity in the sector reignites.

Last but not least, Amazon’s advertising revenue is projected to increase 18% from the same quarter last year, which is significant given the current macro backdrop and the fierce competition from Alphabet and Meta. Even though the digital-ad business makes up only a small percentage of the overall revenue, its strong growth validates that Amazon’s diversification efforts are on the right track.

Fundamental strength

Strong financial figures are expected for Amazon as its recent cost-cutting campaign has proved to be successful, while its volatile growth components are reaching a more mature and stable stage. The e-commerce giant is expected to post revenue of $131.46 billion for the second quarter of 2023 according to consensus estimates by Refinitiv IBES, which would represent year-on-year growth of 8.44%. Additionally, earnings per share (EPS) are estimated at $0.35, marking a massive 94.43% increase on an annual basis.

Tremendously high valuation

Amazon has worn the crown of the most expensive tech stock in the world for quite a long time and this theme has not subsided even if the firm is not one of the main horses into the AI race for now. The 12-month forward price-to-earnings ratio, which denotes the dollar amount someone would need to invest to receive back one dollar in annual earnings, currently stands at 59.4x. This ratio is not only way higher than S&P 500’s 19.8x but also far exceeds tech-heavy Nasdaq’s 28.9x.

Amazon’s forward multiples seem exorbitant even within the ‘Magnificent 7’ clan and in contrast to the vast majority of this group, its stock price is currently way below the all-time high level. This underperformance could be the product of its small exposure in the AI sphere compared to the other tech giants, thus investors might need to hear some guidance towards new projects in AI to justify the massive premium.

Strong rally but long way to complete recovery

From a technical standpoint, it is clear that Amazon’s share bottomed out in early 2023 and has been in a strong uptrend since then. Although most major tech companies are trading near or have already revisited their all-time highs during the 2023 bull market, Amazon remains far from its corresponding record levels.

Therefore, if earnings surprise to the upside, the stock will probably have the necessary momentum to push higher and test the 2023 peak of $136.50.  Conquering this barricade, the bulls could then aim for the September 2022 peak of $146.50.

On the flipside, worse-than-expected results and poor guidance may send the price lower to challenge the recent support of $126.00, which lies very close to the 50-day simple moving average (SMA). Sliding beneath that floor, the price could descend towards the $114.00 resistance, which could serve as support in the future.