Should I Buy Amazon On The Dip?

Amazon (AMZN) was punished last month after the tech company failed to live up to top line revenue estimates, while its management also diluted investor expectations with some less-than optimistic guidance for the next quarter.

But it’s an ill wind that blows no good, and a dip in share price might actually present a solid buying opportunity for investors right now.

What’s the current state of Amazon’s various business segments? Is the world’s largest online retailer still a value play at the present time?

AMZN Earnings: The Good, The Bad, And The Downright Disappointing

It’s an often over-used euphemism, but Amazon.com, Inc. (NASDAQ:AMZN) definitely had a “mixed” second quarter 2021, with some reassuring news drowned out by some even more depressing headlines.

On a positive note, net sales grew 27% to $113.1 billion for the quarter, up from $88.9 billion the same time last year.

Operating cash flow also increased 16% from $51.2 billion to $59.3 billion, as did operating income which rose 33% to $5.8 billion.

The firm beat its EPS expectations by $2.80, clocking in a net income of $15.12 per diluted share versus $10.30 in 2020.

On a less positive note, analyst and investor focus was drawn mainly to Amazon’s top line miss of $1.98 billion, with the company recording revenues of just $113.1 billion, up 27.2% year-on-year.

Free cash flow was also down, dropping markedly from $31.9 billion in 2020 to $12.1 billion for the trailing twelve months period (TTM).

What wasn’t in any doubt, however, was the market’s reaction to the company’s revenue miss, which saw Amazon’s share price fall 8% overnight from $3,600 to $3,327.

On initial inspection, a drop of 8% seemed like an overreaction, especially given that the business still grew revenues by almost 30%, not to mention a bottom line beat which saw EPS increase 47% year-on-year.

However, what probably compounded the negative investor sentiment in the wake of this earnings report was the guidance that Amazon’s management provided for the rest of the year.

Rather than upping its Q3 sales forecast, the e-commerce giant revised down its revenue estimates to $106-112 billion – $6-12 billion below the consensus estimate of $118.72 – signaling the pandemic tailwinds which helped it post a record first quarter earlier this year might now be over.

Furthermore, operating income of $2.5-6 billion was guided way under this quarter’s figure of $7.7 billion.

Is The Business Still Strong?

Despite some poor guidance and a very rare revenue miss – you’d have to go back to Q1 2019 for the last time the company failed to meet Wall Street’s top line estimates – investor’s would be right to question the health of Amazon’s underlying operation. Again, the picture here is not so clear cut.

To begin with, Amazon’s cloud computing wing, Amazon Web Services (AWS), is in great shape, continuing to beat analyst targets on sales figures, while further expanding its global strategic partnership with Salesforce to streamline data integration with various Salesforce applications.

AWS increased revenues this quarter by 37%, bringing in a total $14.81 billion versus the consensus figure of $14.18 billion.

Its cloud segment also enjoyed significant customer momentum of late, with migrations to its platform from key companies including Ferrari S.p.A., The National Hockey League (NHL) and Bell Canada among many others.

That said, Amazon’s online stores revenue fell below its current trend line, failing to meet its expected sales of $56.71 billion, coming in instead at a much lower $53.16 billion.

It does seem to suggest that as the pandemic recedes, customers are less likely to shop online either now or in the near future, with the same pattern appearing to hold true too for its subscription service, Amazon Prime, which grew more slowly on a sequential basis this quarter than it did in Q1.

But physical stores and third-party seller services did return to positive growth, having lost ground last quarter compared to its sales in the fourth quarter of 2020.

Is Now A Good Time To Buy Amazon?

There’s something of a paradox with Amazon’s valuation right now: its revenues have continued to rise year-on-year, but its share price hasn’t managed to keep up.

The company’s high absolute stock price cost – share’s currently exchange hands for $3,290 – means that a round lot would set buyers back more than $30,000, something which is psychologically off-putting and could account for its lack of price action.

But this presents an opportunity for investors.

There’s little doubt that the company’s market cap will eventually grow to reflect its earnings momentum, but for the time being it remains grossly undervalued.

Its financial metrics even tell the same story; Amazon’s TTM GAAP PEG ratio is astoundingly low at just 0.48, which tells of a high earning business whose stock price has failed to compensate for such rapid growth.

The same is true of Amazon’s price-to-sales (P/S) multiple too – not least when you compare it to other FAANG companies as well. For instance, Amazon’s forward P/S is a low 3.5, whereas other Big Five enterprises, such as Facebook (FB) and Alphabet (GOOG), trade at more than double that with P/S numbers of 8.6 and 7.3 respectively.

With such an attractively low valuation, Amazon’s shares are primed to explode upwards on the basis of just one positive catalyst. That could easily come the way of a good third quarter earnings card, as expectations are low after the company’s downbeat guidance. The potential to outperform should be high, meaning those who buy now could be in for some significant upside gains in the not-too-distant future.

On a discounted cash flow basis, the upside potential for Amazon share price sits at $4,170 per share, representing a 26% upside possibility at the time of research.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.