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Amazon Stock Drops 12%: Is it Time to Buy After Selloff?

Published 08/05/2024, 02:55 AM
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  • Amazon stock plunged as much as 12% on Friday
  • The company posted a rare revenue miss, although earnings came in better than expected
  • Should investors view this as a buying opportunity?

Amazon missed revenue estimates, but net sales were still up 10% in the second quarter.

Amazon (NASDAQ:AMZN) stock was plummeting Friday, down more than 12% at its lowest after the e-commerce and cloud computing leader had a rare revenue miss. Should investors be looking to buy Amazon stock after the selloff?

The company generated $148 billion in revenue in the quarter, which was up 10% from the same quarter a year ago. However, analysts had predicted a median of $148.7 billion in revenue in the second quarter.

Net income doubled year-over-year to $13.5 billion, up from $6.7 billion in the same quarter a year ago. Earnings rose to $1.29 per share, up from 66 cents per share in Q2 2023. This came in well above the $1.03 per share estimate.

An Overreaction by Investors?

Amazon’s net income rose sharply due to the revenue gain, but also because of effective cost management, as expenses only rose 5% in the quarter. The biggest area of savings came within sales and marketing, as expenses fell 2% compared to the same quarter a year ago.

As for revenue, the results came within the expected range, as Amazon had projected $144 billion and $149 billion in revenue for Q2, up 7% to 11% year over year. The $148 billion in actual revenue came in at the high side of that range, yet analysts had anticipated more.

Within e-commerce, the North America segment saw net sales rise 9% to $90 billion, while international sales jumped 7% to $31.7 billion. However, the pace of growth was slower than the previous quarter, when these segments rose 12% and 10%, respectively.

Amazon Web Services, its cloud computing business, had a strong quarter, with revenue up 19% year-over-year to $26.3 billion. This outpaced Q1, when AWS had 17% year-over-year growth.

“We’re continuing to make progress on a number of dimensions, but perhaps none more so than the continued reacceleration in AWS growth,” Andy Jassy, Amazon president and CEO, said. “As companies continue to modernize their infrastructure and move to the cloud, while also leveraging new Generative AI opportunities, AWS continues to be customers’ top choice.”

NHL, NBA and Prime Day

In the third quarter, Amazon anticipates net sales between $154.0 billion and $158.5 billion, which would be 8% and 11% growth compared with the third quarter of 2023. That is basically the same growth rate it called for in Q2.

Also, it anticipates operating income to settle between $11.5 billion and $15.0 billion, compared with $11.2 billion in third quarter 2023. However, operating income was $14.7 billion in Q2.

The third quarter should be strong from a revenue standpoint, as it will include what Amazon called the biggest Prime Day shopping event in its history. It also featured the launch of new seasons of two of its most popular shows, The Boys and Fallout. Also, Amazon secured the rights to broadcast NHL hockey on Monday nights and streaming rights for the NBA starting in the 2025-26 season.

Amazon also rolled out some new AI-powered features, including Rufus, a shopping assistant, and expanded Amazon Pharmacy’s RxPass program to offer Prime members on Medicare unlimited consumption of 60 common prescription medications for $5 a month.

In addition, Amazon signed new AWS agreements with several organizations, including Commonwealth Bank of Australia, Databricks, Discover Financial Services (NYSE:DFS), Eli Lilly and Company (NYSE:LLY), Experian, GE HealthCare (NASDAQ:GEHC), NetApp (NASDAQ:NTAP), Scopely, ServiceNow (NYSE:NOW), and Shutterfly, among others.

Further, it inked a $2 billion strategic partnership with the Australian government to provide cloud services to enhance the nation’s defense and intelligence capabilities.

Is Amazon Stock a Buy After Earnings?

Friday’s selloff looks like an overreaction to missing revenue estimates that were above what the company itself established.

The reaction from analysts was somewhat mixed, as most modestly lowered their price targets, including Goldman Sachs (NYSE:GS) and JPMorgan Chase (NYSE:JPM), while some, including Roth MKM and JMP Securities, raised their price targets.

However, Amazon stock remains a buy among most analysts, with a median target of $220 per share, which would be a nearly 33% increase over its current price $166 per share price.

Ultimately, Friday’s correction presents a buying opportunity for investors as the valuation had become quite high, with a P/E ratio of just over 50. Now the forward P/E is down to a more reasonable 39.

There could be more volatility in the coming weeks, as there is a price correction going on among overheated large-cap stocks. But Amazon is a forever stock, and if you can buy at this level, or even lower, that’s not a bad deal.

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