(Bloomberg) — Amazon.com Inc.’s “show-me” moment will arrive on Tuesday when its earnings become the latest litmus test on appetite for heavy artificial intelligence spending.
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The message so far from investors: shares of firms that demonstrate progress in monetizing AI will be rewarded, while firms that don’t will see their stock price punished.
Last week’s misfire by Meta Platforms Inc. triggered a roughly $400 billion selloff in tech stocks amid concerns about the benefits of heavy spending on artificial intelligence. Later results from Alphabet Inc. and Microsoft Corp. eased those fears.
When Amazon reports, scrutiny will be on its web services segment, where it uses generative AI. Options traders are pricing in a move of nearly 8% in either direction for the stock a day after the report, according to data compiled by Bloomberg.
“It’s all about AWS, how much they’re maintaining market share and then what they’re doing in AI to increase the bottom line,” said Paul Marino of GraniteShares.
“Amazon has an incredibly steady retail business and that’s all great and they’re a dominant player — but none of that means anything if what they’re doing in the cloud, and what they’re going to do with AI, doesn’t bear fruit.”
Amazon believes generative AI cloud services can generate billions in revenue in the coming years, and has invested heavily in the technology to ramp up.
Crucial to how well its report is received is how Amazon communicates its outlook, with Meta’s slump last week partly coming down to what investors regarded as a lack of clarity. That’s key at a time when traders are rapidly reassessing whether the Federal Reserve will cut interest rates this year.
“They were not very clear about what the next couple of quarters look like, they were not very clear about what AI gains will mean to them in terms of profitability,” said Brian Mulberry, a client portfolio manager at Zacks Investment Management Inc., of Meta.
“The focus is a little bit less right now, I think, on the near term results from the last quarter,” he added. “It’s more about what is your guidance looking like, knowing that interest rates are now going to be higher for longer.”
Read more: Alphabet’s Cash Boom Is Raising Dividend Hopes on Wall Street
The last few megacap earnings reports have also put the return of capital to shareholders in focus. Google parent Alphabet’s share price jump last week was also driven by its announcement of a new dividend and additional $70 billion in buybacks in its earnings release.
That leaves Amazon as the final big tech company that doesn’t currently offer a dividend. Investors are awaiting a potential announcement, alongside a possible expansion of its buyback program.
Amazon is well-liked by Wall Street, with no analyst sell recommendations, according to data compiled by Bloomberg. The average price target implies more than 17% upside from Monday’s close.
Still, if Amazon doesn’t meet expectations in the quarter or fails to give solid-enough commentary, Meta’s earnings rout offers an uncomfortable example of where investor sentiment currently lies.
“It’s priced to perfection. It’s an unbelievable company, it’s a monopoly and very macro-related. I just think it’s over-owned,” said Ted Mortonson, managing director at Robert W. Baird & Co., Inc.
“AWS has to see material acceleration,” or Amazon stock will be sold, Mortonson said.
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