Amazon results bring more scrutiny to AI-connected stocks

Amazon results bring more scrutiny to AI-connected stocks

(Bloomberg) — Amazon.com Inc.’s ‘show-me’ moment will arrive Tuesday, when earnings will become the latest litmus test for the willingness to spend heavily on artificial intelligence.

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The message so far from investors: Stocks of companies that show progress in monetizing AI will be rewarded, while companies that don’t will see their stock prices punished.

The Failure of Meta Platforms Inc. last week triggered a sell-off of about $400 billion in tech stocks amid concerns about the benefits of heavy spending on artificial intelligence. Later results of Alphabet Inc. and Microsoft Corp. took away this fear.

When Amazon reports, the research will focus on its web services segment, where it uses generative AI. Options traders are pricing the stock in a nearly 8% move in either direction a day after the report, according to data compiled by Bloomberg.

“It’s all about AWS, how much market share they retain and what they do in AI to increase profits,” says Paul Marino of GraniteShares.

“Amazon has an incredibly stable retail business and that’s all great and they’re a dominant player – but none of that means anything if what they do in the cloud, and what they’re going to do with AI, doesn’t. pays off.”

Shares of Amazon fell as much as 1.4% on Tuesday, after rising 4% over the previous two trading days.

Amazon believes generative AI cloud services could generate billions in revenue in the coming years, and has invested heavily in the technology to ramp it up.

Critical to how well the report is received will be how Amazon communicates its prospects, with Meta’s slump last week partly due to what investors perceived as a lack of clarity. That’s critical at a time when traders are quickly reassessing whether the Federal Reserve will cut rates this year.

“They weren’t very clear about what the next few quarters would look like, they weren’t very clear about what AI gains will mean for them in terms of profitability,” said Brian Mulberry, client portfolio manager at Zacks Investment Management Inc., of Meta.

“The focus at the moment is a little less on the short-term results of the last quarter, I think,” he added. “It’s more about what your guidance looks like knowing that interest rates are now going to be higher for longer.”

Read more: Alphabet’s cash boom boosts dividend hopes on Wall Street

The last few megacap earnings reports have also put a spotlight on the return of capital to shareholders. Google parent Alphabet’s stock price surge last week was also driven by the announcement of a new dividend and additional $70 billion in buybacks in its earnings release.

This makes Amazon the last major technology company not currently offering a dividend. Investors are waiting for a possible announcement, in addition to a possible expansion of the buyback program.

Amazon is popular on Wall Street, with no sales recommendations from analysts, according to data compiled by Bloomberg. The average price target implies an increase of more than 17% compared to the current level.

But if Amazon doesn’t meet expectations this quarter or fails to provide firm enough commentary, Meta’s earnings decline provides an uncomfortable example of where investor sentiment currently lies.

“It’s priced to perfection. It’s an incredible business, it’s a monopoly and very macro-related. I just think it’s too much ownership,” said Ted Mortonson, president of Robert W. Baird & Co., Inc.

“AWS needs to see a material acceleration” or Amazon shares will sell off, Mortonson said.

Top tech news

  • The US move to ban TikTok marks a new phase in tackling data security that could ultimately impact everything from electric vehicles to healthcare, reshaping trade ties between the world’s largest economies.

  • Huawei Technologies Co.’s profits rose for the fourth quarter in a row, a sign that the Chinese technology company is taking market share from Apple Inc. and other smartphone rivals.

  • Meta’s social media platforms Facebook and Instagram are under investigation by the European Union over concerns they are failing to eliminate Russia’s targeted disinformation aimed at sowing division on the continent.

  • Samsung Electronics Co. beat analysts’ profit expectations after its semiconductor division returned to profitability after companies including Microsoft Corp. and Alphabet Inc. led in spending on artificial intelligence services.

  • Microsoft Corp. will invest $1.7 billion to build out cloud computing and artificial intelligence infrastructure in Indonesia, betting Southeast Asia’s largest economy will drive growth.

Earnings Tuesday

  • Pre-market

    • PayPal

    • Gartner

    • Corning

    • Zebra technology

    • CommVault

    • IPG Photonics

    • ACI worldwide

  • Post market

–With help from Jeran Wittenstein.

(Updates share move in seventh paragraph.)

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