• Amazon.com will unveil its Q1 results on Tuesday after the market close

• AI will be front and centre, both for actual results and for future plans

• But will investors be impressed amid a pullback in the stock?

Q4 set the bar high

Amazon’s share price skyrocketed after it announced its Q4 earnings back in February, pulling the broader uptrend a leg higher. Sales were boosted by a bumper holiday season and ads revenue also soared. But growth in its cloud business accelerated only slightly and the contribution from its investments in artificial intelligence (AI) was insignificant.

Given how paramount cloud computing has been in generating revenue growth in recent years, the overly positive market reaction was somewhat odd. But Chief Executive Andy Jassy was upbeat about the prospects for Amazon Web Services (AWS), there was a lot of talk about AI, and together with the strong guidance for Q1, investors had enough good news to go with.

Hopes for more double digit growth

This puts the focus squarely on cloud growth and AI for the Q1 earnings announcement. Specifically, whether the company has been able to make substantial enough progress in adopting AI into its products and services, so that there are visible results in generating more revenue, will be a crucial barometer for investors.

First quarter revenue is expected to have risen by 11.8% year-on-year to $142.34 billion, with advertising income forecast to have jumped by 23.5% to $11.74 billion according to LSEG analysts. Earnings per share are projected to have more than doubled from $0.31 a year ago to $0.83 in the March quarter.

All eyes on Amazon’s AI plans

Amazon is seen to have fallen somewhat behind its rivals Microsoft and Alphabet when it comes to the use of AI in cloud computing. But the company has upped its efforts in recent months, partnering with AI startup, Anthropic, to develop generative AI applications.

AWS is expected to be the main beneficiary of AI integration – something that could help the company stay ahead of the cloud race amid intensifying competition.

Ads revenue still important

Another key revenue segment for Amazon is its ads business. AI has a growing role to play in advertising as well, but Amazon’s ads unit has already been enjoying strong growth over the past year. What investors will be paying attention to most this time is the impact of its new ad-supported tier in Prime Video.

The company started rolling out limited advertisements on its streaming platform on January 29, following a similar move by rival Netflix that turned out to be successful.

Investors will also be keen to see that the company managed to maintain improved margins in its online retail business. The growing profitability of its online stores, combined with Jassy’s broader cost-cutting drive have underpinned the stock’s 16% year-to-date rally amidst all the euphoria surrounding AI.

Valuation remains under scrutiny

However, whilst other tech giants have seen their stocks surge by a lot more, Amazon had a hefty valuation to begin with, which has become even more bloated now. The company currently has a 12-month forward price/earnings (P/E) ratio of just under 39 as of April 24, second only to Tesla but higher than Nvidia’s and Microsoft’s multiples of around 30.0.

 

Nevertheless, analysts have maintained their ‘Buy’ rating for the company, raising the median price target from $205.00 to $215.00 over the past month.

This is somewhat above the stock’s all-time high of $189.77 reached on April 11. Since then, the price has pulled back to around $177.50 near its 50-day moving average (MA).  The fact that the 50-day MA acted as a pivot point is significant and potentially paves the way for a rebound should the earnings numbers impress.

Are more record highs in store for the stock?

However, there’s likely to be strong resistance at the ascending trendline, followed by the record peak of $189.77 before psychologically key levels such as $200.00 come into scope.

In case of any disappointment in the Q1 results or in the guidance for the current quarter, the stock could slip back below the 50-day MA, shifting the risks to the downside, with the $166.00 and $154.00 barriers testing the foundations of the longer-term uptrend.

Overall, the scale of the market reaction, either a positive or negative one, will depend on the broader risk sentiment relating to Fed rate cut expectations. But for Amazon, as long as revenue growth of the cloud and ad units live up to expectations, investors are likely to remain bullish on the stock.