Amazon (NASDAQ:AMZN) fell hard after its second-quarter earnings report and the tech sector selloff. Shares are down 17% from their recent high when the e-commerce giant briefly hit a $2 trillion valuation.
Although Amazon stock had been much lower and has since clawed back a few percentage points of gains, when it will regain the $201 per share peak is cloudy. The market is starting a sector rotation away from former high-flying tech stocks, revenue growth is slowing in Amazon’s primary business and it faces a number of challenges on the regulatory front.
While there are plenty of tailwinds behind Amazon stock that could propel it higher, investors want to know how soon it will resume its growth trajectory. Despite AMZN still being a good, long-term buy-and-hold position, can you get in at a better price point? I think you can.
AWS Is Where Amazon Still Finds Growth
Net sales rose 10% in the second quarter to $148 billion. The growth rate is down three percentage points from the first quarter and slightly below the year-ago rate. E-commerce growth, however, was up just 8% year-over-year and 3% sequentially.
The star remains Amazon’s cloud-service business AWS, which saw revenue jump 19% from the year-ago period to a record $26.3 billion and 5% sequentially. Last year, AWS revenue rose just 12%. As more businesses move their data to the cloud and artificial intelligence spend ramps up, AWS is continuing to gain customers and growing market share.
AWS share grew to 32% in the second quarter from 31% in the first. It seems to come at the expense of Microsoft (NASDAQ:MSFT), which saw its share of the cloud market slip from 25% to 23%. Alphabet’s (NASDAQ:GOOG, GOOGL) Google Cloud performed best, jumping to 12% from 10% as sales raced ahead 29% year-over-year. It is still the smallest cloud business, though, with $10.3 billion. Like AWS, Microsoft Azure saw a 19% rise in sales.
But E-Commerce Is What Feeds the Machine
The problem for Amazon is that e-commerce is still where it derives most of its revenue from. Both the North American and international markets represent over 82% of the retailer’s $148 billion total. AWS remains its profit driver, accounting for almost 63% of operating income, but it is e-commerce that provides the financial wherewithal that allows Amazon to operate its many arms.
And Amazon’s outlook for the third quarter was what disappointed investors most this quarter. It forecasted sales of $154 billion to 158.5 billion. That would represent a further slowing of growth at the midpoint to a 9% increase from last year. The guidance was also below Wall Street’s estimate of $158.4 billion.
Of course, when you have a juggernaut the size of Amazon, getting the same fantastic year-over-year growth rates it did as a smaller company becomes increasingly difficult. But as the e-commerce space matures, Amazon is finding it faces more competition from newer rivals as well as older rivals.
Two upstarts out of China, Schein and PDD Holdings (NASDAQ:PDD) Temu burst onto the scene and have been quickly taking sales that used to belong to Amazon. That has forced the e-commerce giant to respond by opening a discount storefront in China to combat the inroads they made.
Amazon Stock Outlook: Better Off Waiting
Slowing growth is going to weigh on Amazon stock for a while. The company also faces regulatory questions about its investments in the AI shop Anthropic in both the U.S. and the U.K.
Amazon has invested billions in the business and the governments want to know whether it is violating antitrust rules. That could slow further investment by Amazon into AI, at least through that channel.
Coupled with more intense competition, Amazon stock doesn’t appear ready to spring back into action. It may be a slower slog higher from here and could even see its stock fall further. Buying now isn’t a bad idea, especially for long-term investors. But you will probably be able to get better prices before it retests its recent high.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
On the date of publication, Rich Duprey did not hold (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.
