Is Amazon's Chart Signaling Big Returns?

| About: Amazon.com, Inc. (AMZN)

By David Gibbs

Amazon.com Inc. (NASDAQ: AMZN) received mixed reviews following its quarterly report last Thursday after the close. While revenue grew strongly yet again, operating costs came in much higher than expected. Those in favor of shares would argue that the increase in costs was merely a result of capacity expansion ahead of the holidays, and thus that any increase in costs will be met by even greater increases in future revenue. Still, you’ll need to be more persuasive than that to convince a cost-conscious investment community to look the other way.

Earnings: Q3 profits of $231 million ($0.51/share) vs. $199 million ($0.45/share) in 3Q09.

Revenue: Up 39% YoY to $7.56 billion.

Actual vs. Wall St. Expectations: AMZN beat the Street on EPS as analysts had been expecting earnings of $0.48/share. Revenue came in at the high end of July guidance ($6.9 billion-$7.6 billion).

Notable Stats: Amazon’s catch-all Electronics & Other General Merchandise category grew 68% YoY. Growth of Traditional Media sales slowed to 14%.

Q4 revenue projections came in at $12 billion – $13.3 billion vs. consensus estimates of $12.3 billion. Projections for operating income were somewhat extreme, ranging all the way from a 24% loss to an 18% gain year-over-year.

Gross margins rose to 23.5% from 23.4%.

Did You Hear That? “Every year for the last 15 years we’ve worked to improve the things customers care about, and this year is no exception,” said Jeff Bezos, founder and CEO of Amazon.com. “This holiday season we’ll have the best prices, the biggest selection, the highest in-stock, and the fastest delivery in our history.”

Technicals: As the title of this article makes clear, AMZN has butt heads with some fairly important technical indicators in recent weeks. Late last month, shares not only broke out of a double bottom base dating back to last December, but also saw their 50-day moving average cross above their 200-day moving average, forming the much-ballyhooed golden cross.

As the chart below indicates, the breakout point of the double bottom held nicely as shares churned for about a month. A dip of more than a few percent below that mark on heavy volume would indicate that the breakout is, in fact, a failed breakout. But, until then, the breakout point can safely be considered support.

Commentary: While neither the golden cross nor double bottoms are guarantors of future success, it is undeniable that AMZN’s chart augurs in favor of success. Worries over rising costs pressured shares immediately following the quarterly report, but AMZN quickly shrugged off any worries, finishing the week with consecutive up-days on high volume. While AMZN has had a habit of getting a bit extended from time to time, one cannot deny that in the long run sales are migrating towards e-commerce. In such an environment, AMZN cannot but grow EPS.

Click to enlarge

Disclosure: No holdings in AMZN.