Amazon (NASDAQ:AMZN) has long been a powerhouse in both e-commerce and cloud computing, captivating investors with its growth potential. However, recent market dynamics have led to question marks as to how Amazon stock may behave in the rest of 2024.
After its latest earnings report, AMZN shares declined around 10%, exacerbated by a broader market selloff. We should note that, despite this recent downturn, the stock has gained nearly 10% year-to-date. Similarly, the Nasdaq 100 index has advanced 10%. Meanwhile, the ProShares Online Retail ETF (NYSEARCA:ONLN) rose about 9% in the same period.
This article will look at Amazon’s recent earnings results as well as some of the challenges it faces as well as future opportunities. We believe that despite the long-term growth prospects, new investors should not rush to buy Amazon shares in August, yet.
Amazon’s Q2 Earnings: A Mixed Bag for Investors
On August 1, Amazon announced its second-quarter earnings, showing significant growth yet ultimately disappointing the market. The company reported a 10.2% year-over-year (YOY) increase in revenue, reaching $148 billion, which fell short of Wall Street’s expectations. Notably, Amazon’s net income surged to $13.5 billion, compared to $6.7 billion a year ago
Despite its dominant market position in the online space, Amazon faces several risks that could impact future performance. Increasing competition from low-cost retailers such as Temu (NASDAQ:PDD) and Shein poses a significant threat to its e-commerce market share. For instance, in the North American segment, which includes the core retail business and services like Amazon Prime, growth was only 9%, falling short of the expected double-digit increase.
Furthermore, the company’s guidance for the third quarter projects sales between $154 billion and $158.5 billion, which is below analyst estimates. Management noted that consumers are being cautious and are “looking for deals,” a sentiment that has contributed to the market’s apprehension, particularly in light of recent economic data.
Despite the recent pullback in its share price, Amazon’s forward price-to-earnings (P/E) ratio stands at 39.4x. This is significantly higher than the sector average of 10.3x. The company’s price-to-book (P/B) and price-to-sales (P/S) ratios are at 7.4x and 2.9x, respectively, compared to the sector averages of 1.4x and 0.9x. These metrics suggest that investors are paying a premium for Amazon’s shares based on expectations of strong future growth and profitability. However, the high valuation in Amazon shares also implies higher expectations, which could increase volatility and risk in the rest of the quarter.
Bullish on Amazon in the Long Term
Despite short-term challenges, there are compelling reasons to maintain a bullish outlook on Amazon stock in the long run. The company’s dominance in e-commerce and cloud computing provides a strong foundation for sustained growth. Amazon Web Services (AWS) holds a 31% market share, significantly ahead of its closest competitor, Microsoft’s (NASDAQ:MSFT) Azure, which has a 25% share. This leadership is crucial, with the global cloud market expected to exceed $1.9 trillion in 2031, growing at a compound annual growth rate (CAGR) of 16.8% from 2024 to 2031.
Meanwhile, Amazon’s recent Prime Day event in July generated a record $14.2 billion in online spending, up 11% from the previous year’s event. This strong performance is expected to be reflected in Amazon’s third-quarter results. Strategically, Amazon plans to launch a discount store featuring unbranded items priced below $20 to compete with low-cost retailers. Thus, the company could potentially capture a larger market share in online spending.
Cautious Optimism on AMZN Stock
Currently, AMZN stock is around $167, down well over 15% from its 52-week high of $201.20 reached on July 8. As a result, Amazon shares are trading below the 50-day moving average (MA) of $185, which will likely act as a potential resistance. In the short run, we anticipate that AMZN shares may re-test recent lows around the $150 level before establishing a stronger base.
While Amazon grapples with short-term challenges like slower revenue growth and cautious consumer spending, its long-term outlook remains promising. The company’s dominance in both e-commerce and cloud computing provides a solid foundation for future growth. Analysts view the reacceleration of AWS as a major positive, noting that it remains the top choice for businesses updating their infrastructure.
Meanwhile, Wall Street also remains optimistic in the long run. The 12-month median price forecast stands at $220, representing over a 30% upside potential. Finally, historical performance supports a bullish outlook, with investors who bought shares around $90 in August 2019 enjoying returns exceeding 120%.
In conclusion, Amazon stock presents a strong long-term investment opportunity due to its strategic initiatives and market leadership. However, given current challenges, timing is key. Buying the dips could be a viable approach for long-term investors, but a cautious approach is advised for the rest of August and even September.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or
indirectly) any positions in the securities mentioned in this article.