• Amazon unveils earnings on Thursday August 1 after the market close

• Impressive earnings growth expected, fueled by advertising and AWS

• Valuation at historically low levels amid stock’s short-term pullback

Strong start to the year

Amazon has been having a relatively strong year amid an overall tech outperformance. Firstly, the firm’s e-commerce business has been more than resilient as the US economy appears to be headed for a soft landing.

Besides its core retail business, Amazon's high-margin segments like advertising and AWS (Amazon Web Services) have also been performing exceptionally well. The advertising business has seen significant growth, largely driven by a series of major elections worldwide. At the same time, AWS continues to expand rapidly as more and more companies adopt cloud services.

Quarter highlights

As with almost every tech company in the world, Amazon needs to provide updates on its AI offerings. Investors have been relatively bullish on that front due to the firm’s commitment earlier in the year to increase its spending towards AI initiatives.

Additionally, AWS's performance will be closely scrutinized by market participants as Amazon strives to maintain its leading position in the cloud market amidst increasing competition from tech giants like Microsoft and Google. Specifically, the cloud arm is forecasted to grow 17% year-on-year, while also expand in quarterly terms.

Another area of interest is the company’s advertising segment as Amazon has been attempting to diversify its business through investments in this sector. Despite fierce competition from Alphabet and Meta, advertising revenue is expected to rise by 21.33% compared to the same quarter last year.

Fundamental strength

Strong financial figures are expected for Amazon, driven mainly by the solid performance of its advertising and cloud businesses. The e-commerce giant is expected to post revenue of $148.53 billion for the second quarter of 2024 according to consensus estimates by LSEG IBES, which would represent year-on-year growth of 10.53%. Additionally, earnings per share (EPS) are estimated at $1.02, marking a staggering 57.10% increase on an annual basis.

Valuation corrects but retains premium

Amazon has worn the crown of the most expensive tech stock in the world for quite a long time, but this theme seems to be subsiding given that the firm is not one of the main horses within the AI race. 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 34.3x.

Although this figure looks rosy even when compared to the Nasdaq’s multiple of 28.3x forward earnings, Amazon’s valuation is currently at its lowest level in more than 10 years. At the same time, Amazon shares are trading in breathing distance from their recent fresh all-time high. This downward adjustment in the firm’s valuation could be the product of its small exposure in the AI sphere compared to other tech giants.

Stock pulls back ahead of earnings

From a technical standpoint, Amazon’s stock has been trending higher since the beginning of 2023, posting a fresh all-time peak of $201.20 on July 8. However, the price has been undergoing a downside correction since then, falling below its 50-day simple moving average (SMA) on the back of a broader tech selloff.

Therefore, if earnings surprise to the upside, the stock might edge back above its 50-day SMA to test the May high of $191.70. Conquering this barricade, the bulls could then aim for the all-time high of $201.20.

Alternatively, should the price violate its supportive long-term trendline, initial support could be found at the May low of $174.00. Sliding beneath that floor, the price could descend towards the April low of $166.00, which lies very close to the 200-day SMA.