This week’s tumultuous stock market activity has roused a beast of fear within investors. Tech shares tumbled, while safe-haven bets like utilities and pharmaceuticals witnessed a surge in interest. The Nasdaq, in a staggering turn, nosedived into correction territory, plummeting over 10% from its recent peaks. Bruised by a relatively lackluster jobs report – with 114,000 jobs created versus the expected 185,000 – many are flirting with the dreaded ‘R’ word: recession, and consequently, shedding their stock holdings in a frenzied panic. The jitters are palpable, indeed. Yet, amidst the market’s stormy seas, lies a glimmer of opportunity.
For those with foresight, moments such as these present a chance to don the cape of the savvy investor and swoop in to snag stocks at prices more appetizing than the heady peaks of yesteryears.
Not even the “Magnificent Seven” are impervious to a market correction. A behemoth like Amazon (NASDAQ: AMZN), trading 20% below its recent zenith, stands as a tantalizing prospect in the current tumultuous landscape.
The downturn in Amazon’s trajectory may well signify an auspicious moment for discerning investors to scoop up shares at a bargain.
Decoding Amazon’s Earnings: A Closer Look
The market’s lukewarm reception to Amazon’s second-quarter earnings may have rattled some, yet it’s crucial to see beyond the immediate noise. While Q2 saw net sales ascend by a modest 10% to $148 billion – a deceleration from the 13% growth in the previous quarter – this shift isn’t entirely unexpected given the broader slowdown in consumer expenditure. Of noteworthy mention is Amazon’s staggering 91% surge in operating income, rallying from $7.7 billion in the previous Q2 to a whopping $14.7 billion this year.
Despite this stellar showing, Wall Street appears somewhat rattled by the marginal deceleration in growth from the first to the second quarter, compounded by resurfacing recession concerns. However, the jewel in Amazon’s crown, AWS, shines bright amidst the cloudy horizon.
AWS, Amazon’s cash cow, contributed a staggering $66 billion in operating profits from 2021 to 2023, embodying a colossal 89% of the company’s total operating profit. The AI surge sweeping the cloud service domain magnifies this potency, with AWS poised to reap substantial gains as generative AI programs demand immense data and processing capabilities.
The graph below showcases an acceleration in AWS revenue growth over the last three quarters, a trend prophesying good fortunes for Amazon’s operational and shareholder realms.
Data Source: Amazon
This promising trajectory augurs well for Amazon’s fortunes and stock valuation in the long haul.
Is Amazon Stock a Prudent Investment Now?
Assessing Amazon’s value entails scrutinizing its price-to-sales (P/S) ratio and price-to-cash from operations (CFO). CFO, elucidating the vigor of the core business’ money generation, is a pivotal metric to observe.
The graphic below underscores Amazon’s 13% undervaluation based on sales and a striking 75% discount based on cash flow compared to its 10-year averages.
This slump marks Amazon’s lowest based-on-cash-flow trading point in the past decade.
Underpinning Amazon’s valuation demands a gaze past a simplistic price-to-earnings (P/E) ratio. Nevertheless, Amazon’s current P/E ratio of 38 stands as the lowest in over a decade.
With overall sales growth anticipated to hover around 10%, and an 8% to 11% growth guided by management for the next quarter, the spotlight turns to AWS, the ultimate profit fountain. Emboldened by AI tailwinds and a trajectory of escalating growth, Amazon beckons shrewd investors to contemplate the wisdom in Warren Buffett’s adages: “Be bullish amidst fear” and “the market’s game is merely a conduit shifting wealth from the restless to the patient.” Words of wisdom likely to yield fruit for Amazon’s faithful.
Is Investing $1,000 in Amazon Now a Sound Decision?
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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.