Should Investors Buy the Dip on Amazon Stock?
Amazon's (NASDAQ: AMZN) stock immediately got slammed after the company announced second-quarter results. It fell nearly 10% the following trading day and proceeded to fall even more in the following days. Although it has partially recovered, it's still off its 2024 highs by a fairly wide margin.
With Amazon still down so much, I think now is an excellent opportunity to take advantage and scoop up one of the best companies on the market at a discounted price.
Some analysts weren't happy with Amazon's Q2 results
Although Amazon fell following earnings, the reason it fell is silly, especially for long-term investors. Management guided for $144 billion to $149 billion in revenue growth, and revenue came in at $148 billion for Q2. Normally, that's good enough, but because Wall Street analysts expected $148.6 billion, investors weren't satisfied.
Additionally, Q3 guidance was slightly weaker than expected, as the midpoint of Amazon's revenue guidance was $156 billion versus the $158 billion analysts expected.
While that may matter for investors who are trading in and out of the stock, over the long term, that guidance "miss" means nothing, as the core business is still strong.
The biggest segment and the one most people are familiar with, online stores, continued its slow growth, only increasing 6% year over year. This segment is rather mature, and that growth rate has been fairly common over the past two years. What pushed it down this quarter was consumers choosing to purchase lower-priced items.
But that's not the segment I'd focus on with Amazon.
There are two primary reasons to invest
The two best reasons to invest in Amazon are its advertising service and its cloud computing business, Amazon Web Services (AWS).
Advertising has been Amazon's fastest-growing segment over the past few years, and this quarter was no exception. Revenue increased by 20% year over year, although this was the slowest growth rate in two years and missed analyst expectations. Still, management was bullish on its expansion opportunities and believes it's in the early innings of this segment's growth.
AWS picked up the slack, delivering its fastest growth rate since the fourth quarter of 2022. Part of this growth can be attributed to generative artificial intelligence (AI) workloads, but the overall transition to the cloud is still ongoing.
Both AWS and advertising are vital to Amazon's profit picture. Although it doesn't disclose how much advertising contributes, AWS delivers 64% of the operating profit despite only accounting for 18% of revenue. As AWS outgrows most of the commerce segments, look for this division to become an even greater profit contributor.
This will need to continue, as Amazon still has a premium valuation.
The stock still isn't cheap
Even after the sell-off, the stock trades at a price of 37 times forward earnings.
AMZN PE Ratio (Forward) data by YCharts
That's a hefty premium to pay for a company that is only growing revenue at around 10%, especially considering there are many stocks that are far cheaper and growing much quicker (such as Meta Platforms or Alphabet).
However, Amazon's earnings growth is expected to vastly outpace its revenue growth in the next few years.
AMZN EPS Estimates for Current Fiscal Year data by YCharts
As a result, you'll have to pay a slightly higher price today to own a stock that will likely maintain its premium valuation for years to come. If you can live with this, then I think Amazon represents a great buy today, as it's one of the most important companies in the global economy and is on sale from its previous highs.Should you invest $1,000 in Amazon right now?
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