An AI-inflated bubble is bursting in the market, and Amazon (NASDAQ: AMZN) is not immune, but don’t take this as an end to the rally. A bubble is bursting, but this is not the last vestige of an old and tired market we’re discussing. Instead, it is the frothy front edge of a wave that has yet to crash. One AI bubble is bursting, but there will be more as the tide of AI rolls onward, and it will take Amazon with it.
As tepid as the results and guidance may be, tepidness is in the eye of the beholder; there is nothing wrong with them other than failing to meet highly inflated expectations. Because Amazon is growing and showing strength in all segments, and AI is still a growing force in the tech economy, investors should expect this stock to rebound from these lows and do it strongly.
Analysts Give Mixed Response to Amazon News, Forecast 30% Upside
The analysts' response to Amazon’s Q2 release is mixed but does nothing to alter the outlook for higher share prices. Although more analysts lowered their targets than not, conviction is firming that a new all-time high will be set. The takeaway from the price target adjustments is that the range of targets is narrowing around the $210 to $220 levels, aligning with the pre-release consensus estimate, showing a firming belief this stock could advance 30% or more from the post-release lows. Moving to the new all-time high is also a significant technical move and could lead to increased momentum and a move above $230 by the end of the year.
Amazon is Firing on All Cylinders: Overeager Analysts Wanted More
Amazon is firing on all cylinders despite tepid performance relative to its consensus estimates. The company reported $148 billion in net revenue, missing the consensus by a slim 50 basis points but up 10.2% compared to last year. Strength was seen in the 9% gain in North America, Amazon’s largest segment, and in the 7% International growth (10% on an FX-neutral basis), but the real story is in AWS. AWS saw a 19% growth due to heightened demand for AI services and infrastructure, boosting its share of total revenue to 17.7%, an increase of 130 basis points.
Among the critical details is the margin. The margin widened significantly due to CEO Andrew Jassy and the team’s efforts, improving profitability across all segments. Operating margin grew by 91% on a 90% increase in North American margin, profitability in the International segment, and a 72% gain at AWS. The investment in RIVN positively impacted the results but was negligible and in the low single-digit range. What this means for the cash flow is a 75% increase and triple-digit gains for the free cash flow.
The detail that undercut the market is the guidance, which is solid but short of expectations. The company forecasted revenue in a range bracketing the consensus with consensus at the range’s high end, still an 8% to 11% gain versus last year. The guidance is likely cautious, assuming that AI spending continues to build momentum across the stack.
Amazon Falls To Super-Critical Support Level
The price action in AMZN shares is bearish following the release, pushing the stock down to a super-critical support target. That target is near the $165-$170 range, a pivotal price point for the last four years. It capped gains in 2020, 2021, and 2022 and was a critical pivot point in 2023, later retested for support in 2024. Now, the market is back, retesting support at that level again, and it is likely to be confirmed. In that scenario, it is only a matter of time until new highs are set. If not, shares of AMZN could fall to $160 or lower before finding firm support.
