Only a couple of months ago, Amazon’s comeback rally looked unstoppable — until it was. With a huge post-earnings boost, Amazon shares closed at a record high of $284 each on Aug. 3 — an increase of nearly 45% from its 52-week low back in February. It looked like $300 and beyond was just a formality. Since then, however, Amazon has dropped more than 7%, with an up-and-down chart over the past month looking more like seismic activity than stock trading. So, what the heck happened? And what’s it going to take to get shares going again? Analysts at Morgan Stanley gave us some food for thought in a note this week, making their case for why they added Amazon to their top picks list and boosted their price target to $350 from $335, implying 33% upside from Monday’s close. Before getting into what we need to see from Amazon in the weeks and months ahead and Morgan Stanley’s reasons for being so positive, let’s do a quick recap of how we got here. How we got here Last quarter was strong, with the company’s Amazon Web Services (AWS) cloud business crushing sales and operating income expectations. However, what really lit up the stock was CEO Andy Jassy’s commentary on the three-decade usable life of a data center and the profit dynamics of the hardware that goes into them. He said on the second-quarter call: “The servers currently have a useful life of at least five to six years, and most of our AI capacity these days is being contracted for at least five-year terms. That means that we’re driving significant free cash flow on the servers and network of equipment in the two to three years after we break even.” In our earnings analysis at the time, Club portfolio director Jeff Marks wrote that Jassy “delivered exactly what investors like us wanted to hear: a clear explanation of how its massive investment in artificial intelligence will generate returns.” The CEO’s remarks on the post-earnings July 30 conference call were so market-moving and fundamentally important that we dedicated half of the next day’s Homestretch to it. The stock soared more than 15% on July 31 and another 4.5% on Aug. 3 to the aforementioned record-high close. AMZN YTD mountain Amazon YTD Jassy’s words reverberated far beyond just Amazon and are very much at the heart of our broader view on the current market. We think that the high-quality, beaten-down parts of the AI hardware trade are presenting buying opportunities. Jim Cramer made his argument in his Sunday column . Here’s a key line from Jim: “Nvidia’s chips hold up. They may hold their value for 10 years.” Amazon uses a lot of its own custom chips, but it also has a lot of Nvidia chips in its cloud. Jassy said during the Q2 call that won’t change. “We also continue to have a deep partnership with Nvidia and will continue making AWS the best place to run Nvidia chips, as we have customers who will run on Nvidia for as long as we can foresee, and we believe strongly that customers want choice. Choice is good for…
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