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The Q2 earnings season was quite mixed for “Magnificent 7” stocks, and only Meta Platforms (META) managed to come up with a really impressive set of numbers. After Thursday's close, both Apple (AAPL) and Amazon (AMZN) reported their respective earnings for the June quarter. While AAPL is trading higher today after its earnings beat, shaking off widespread selling pressure in the stock market, Amazon is trading sharply lower after the e-commerce giant missed Q2 revenue estimates and its Q3 guidance came in below Street estimates.
Notably, Wall Street analysts were quite bullish on AMZN stock heading into the Q2 confessional, and so the report came as a disappointment, even as the company managed to beat earnings per share (EPS) estimates. In this article, we’ll look at Amazon’s earnings and analyze whether it makes sense for long-term investors to buy the stock after the dip.
Why is Amazon Stock Dropping After Q2 Earnings?
While revenues of enterprise-focused Amazon Web Services (AWS) were ahead of Street estimates and rose almost 19% YoY, sales of its online store grew a mere 5%. Amazon's advertising business reported topline growth of 20% in Q2, but the sales were slightly short of consensus estimates.
Plus, Amazon’s guidance disappointed markets for a third consecutive quarter. The company forecast Q3 revenues between $154 billion and $158.5 billion, which - at the midpoint - arrived below the $158.2 billion that analysts were modeling. Management forecast Q3 operating income between $11.5 billion-$15 billion, which also came up short of the $15.3 billion that analysts were expecting.
Should You Buy the Dip in Amazon Stock?
I believe Amazon stock looks like a buy after the dip today for the following reasons:
1. AWS and AI Opportunity
While the AWS segment suffered multiple headwinds over the last couple of years, its growth has not only stabilized, but accelerated from the troughs. During the earnings call, Amazon’s CEO Andy Jassy highlighted three trends that he believes will drive the growth of AWS. These are:
- Companies are now done with cost optimizations and are now looking at new initiatives;
- Companies are transitioning from on-premise infrastructure to cloud; and
- Businesses see artificial intelligence (AI) as a big opportunity that will lead to higher demand for AWS.
Jassy was quite upbeat on the AI opportunity and said that the company’s “AI business continues to grow dramatically with a multibillion-dollar revenue run rate despite it being such early days.” Along with powering the growth of AWS, generative AI is enhancing the customer buying experience on Amazon’s e-commerce platform.
2. Potential in Advertising Business
Amazon’s advertising business is operating at an annualized revenue run rate above $50 billion, and it potentially has years of strong growth ahead as the company ramps up video ads on Prime's ad-supported version.
3. Continued Transition to E-commerce
The pivot to e-commerce from physical retail is expected to continue, which is a tailwind for Amazon. The company is working to increase its delivery speeds even further, which should help to fuel sales of daily use and perishable items, and increase its share of customer wallets. While these items have lower average prices than other products on Amazon, selling these makes the platform even stickier for consumers. While the competition from Temu and Shein has intensified, Amazon is reportedly looking to launch a similar platform to take on these popular apps. The focus on pharmacy and business-to-business (B2B) segment will also drive long-term growth, as both of these are relatively unexplored opportunities for Amazon.
Overall, I would agree with Jassy’s final comments during his remarks during the Q2 earnings call: “There's a lot to feel optimistic about over the next several years.”
Amazon Stock 2025 Forecast
Amazon is currently battling a tough and uncertain macro environment, where customers are trading down for cheaper alternatives. According to CFO Brian Olsavsky, consumers are "cautious" and "looking for deals.” He added that forecasting for the third quarter was tough due to major events like the Olympics and the U.S. presidential elections. Also, the company said that consumers are holding back their purchases amid all the uncertainty.
However, I believe these are short-term headwinds, and given Amazon’s presence in multiple high-growth themes like e-commerce, cloud, AI, streaming, and digital advertisement, the stock ranks among those names that are perhaps almost always a buy-the-dip candidate. The valuations don’t look too demanding at these levels, either, especially considering the kind of topline and bottom-line growth that Amazon brings to the table.
Overall, I believe that Amazon’s forecast over the next couple of years looks quite promising, even as the company has failed to impress with its Q2 earnings and Q3 outlook. For investors looking to hold a stock into 2025 and beyond, Amazon looks like one of the best stories that's still available at reasonable valuations.
On the date of publication, Mohit Oberoi had a position in: AAPL , AMZN , META . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
