Amazon's Pre-Earnings Setup Is Almost Too Clean-Red Flag?

Having closed out Monday's session just under $233, shares of tech giant Amazon.com Inc. (NASDAQ: AMZN) are now trading within just $10 of their all-time high from last February. The 45% rally since April has been nothing short of extraordinary, a clean, uninterrupted move upward with higher highs and higher lows dominating the chart.

But with Amazon's much-anticipated Q2 earnings due on Thursday, investors now need to ask themselves: has the rally been too perfect? Is sentiment running too hot? Could a strong but not exceptional report trigger a pullback? Let's jump in and take a closer look. 

The Bull Case: Clean Trend, Strong Support

Let's start with what's undeniable. The chart, since April, is immaculate. Since bottoming out at the start of that month, Amazon has barely looked back. Momentum has stayed strong, with effectively no major pullbacks, and the bulls have aggressively defended and bought into every dip.

The stock's relative strength index (RSI) is 68, warm, but far from overbought. Technically, the setup remains undoubtedly bullish.

Add to that the unrelenting analyst support. Already this week, the likes of UBS and Morgan Stanley reiterated their Buy and Overweight ratings, respectively, with their boosted price targets now ranging as high as $271.

If Amazon were to hit this in the coming weeks and months, it'd be well above February's all-time high and far into blue sky territory.

Crucially, Amazon's fundamentals continue to offer support. Consensus estimates for Thursday's report call for a 9.4% year-over-year (YOY) increase in revenue, with earnings per share growth expected to be closer to 3.6% YOY.

Unsurprisingly, the company's AWS unit is expected to contribute quite a bit, with many on Wall Street forecasting its revenue will accelerate into the year's second half and beyond. 

The Bear Case: Expectations Are Sky-High

However, here's the counter-argument: when a stock rallies this hard for this long, it sets a very high bar. And even though analysts are calling for the rally to continue, Amazon may need to deliver more than just strong numbers to justify the recent move.

Keep in mind that the stock's price-to-earnings (P/E) ratio is now at 38, a little frothier compared to last quarter and certainly richer when stacked against peers like Alphabet Inc (NASDAQ: GOOGL), which has a P/E ratio closer to 20.

That kind of valuation demands clear margin expansion, accelerating revenue growth, and/or a blowout AI narrative. Anything less could easily disappoint investors and send them rushing to take profits. 

Some cracks are already being watched; the forecasted 3.6% growth in EPS feels a tad underwhelming. The company's free cash flow has also been declining in recent quarters, and further signs of this trend could be a red flag for long-term investors concerned about capital allocation in the face of surging AI infrastructure costs and geopolitical risks.

Time to Be Cautious or Confident?

If you're already long, there's a strong case for holding through earnings. As noted above, the trend is intact, the analyst community is behind the stock, and Amazon is showing signs of firing on all cylinders.

But if you're looking to initiate a new position, some caution might be warranted; just one soft datapoint or conservative comment could knock the stock back. And here's the rub: because Amazon's rally has had few to no pullbacks, there's no clear line of support unless you go back to around the $200 mark, and that's dangerous. 

However, Amazon remains one of the most dominant businesses in the world, and this week's earnings will be an opportunity to prove that once again. Even if there is a post-earnings pullback, remember, corrections are a healthy and necessary part of a longer-term uptrend, and that's ultimately how investors and Wall Street alike are looking at Amazon today.

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The article "Amazon's Pre-Earnings Setup Is Almost Too Clean—Red Flag?" first appeared on MarketBeat.