August may have just begun, but it’s already been a tough month for Amazon (NASDAQ: AMZN) shareholders. Shares initially fell after the e-commerce giant missed analysts’ revenue estimates when it reported its Q2 results.
Meanwhile, the stock price has fallen further, caught in the global sell-off. A small rate hike in Japan and the unwinding of the carry trade appear to be a reason behind the market’s recent weakness.
Let’s take a closer look at Amazon’s most recent results to see if the sell-off is a good opportunity to buy the stock.
Second quarter results and outlook are not impressive
When it comes to earnings, a stock’s reaction is often tied to expectations leading up to the results. If a company falls short of analyst estimates for a key metric or issues guidance that’s below analyst expectations, the stock will often feel some pressure in the short term.
While Amazon posted a solid 10% revenue growth in the second quarter, its sales of $148 billion fell short of analyst expectations for revenue of $148.6 billion. Meanwhile, it forecast third-quarter sales to grow 8% to 11% to between $154 billion and $158.5 billion. The $156.4 million midpoint of that range, however, fell short of the analyst consensus of $158.2 million.
The company’s cloud computing segment, AWS, led the way with revenue growth of 19% to $26.3 billion. Meanwhile, AWS’s operating income rose 72% to $9.3 billion, from $5.4 billion.
North American revenue rose 10% to $90 billion, while international revenue rose 7% to $31.7 billion. Advertising services led the way, with revenue up 20% to $12.8 billion. The company is bullish on the prospects of incorporating advertising into its Prime Video service and recently signed an 11-year deal with the NBA to broadcast live games. Subscription revenue, meanwhile, grew 11% to $10.9 billion.
Third-party seller services revenue rose 13% to $36.2 billion. Online stores saw just 6% growth to $55.4 billion, while brick-and-mortar stores saw 4% growth to $5.2 billion.
Like its cloud computing peers, Amazon plans to invest heavily to build out the infrastructure needed to support growing demand for artificial intelligence (AI) and non-AI workloads. As a result, capital expenditures (capex) will be higher in the second half than in the first half.
Amazon also continues to promote its new AI chips, Trainium for training and Inferentia for inference, with next-generation versions due out later this year. According to management, the chips are in high demand given their price-performance ratio.
Is it time to take the plunge into Amazon?
Amazon has a number of powerful opportunities before it. First, there’s AI, and the company is pursuing this opportunity at multiple levels, from cloud computing to its own AI chips to offering large language model (LLM) services.
Advertising is another big opportunity, and this area saw strong growth in the second quarter. Sponsored product ads are currently Amazon’s biggest source of ad revenue, but it will also bring more ads to its Prime Video service. Meanwhile, its deal with the NBA will undoubtedly bring a lot of interest and ad revenue to its streaming service.
One downside for Amazon is its valuation. The stock currently trades at a forward price-to-earnings (P/E) ratio of nearly 28 based on analyst estimates for 2025. While that’s lower than historical P/E levels, the company’s revenue growth has slowed over the years.
Given the revenue growth and gross margin profile, I would consider Amazon’s current valuation to be on the high side. Amazon’s gross margins are much lower than those of a software company. For example, Microsoft has gross margins of nearly 70%, while Amazon’s are below 50% and around 31% when processing costs are included.
Given the recent overall weakness in the market, I would probably take a small entry position in Amazon given the opportunity it presents. However, if the selling continues and the valuation becomes more attractive, I will look to add more.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Microsoft. The Motley Fool recommends the following options: long Jan 2026 $395 calls on Microsoft and short Jan 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
Should Investors Buy the Dip in Amazon Stock After Shares Drop on Sales Decline? was originally published by The Motley Fool
