Amazon Revenue Miss Sparks Investor Concerns
Amazon recently reported its second-quarter earnings, showing 10% revenue growth to $148 billion, missing analyst expectations of $148.6 billion. This shortfall led to a dip in Amazon's stock, amplified by a global market sell-off and a small interest rate hike in Japan. Such factors have made investors question whether now is the right time to invest.
Evaluating Amazon's Growth Prospects
One of the standout performers in Amazon's portfolio is its cloud computing segment, AWS, which saw a 19% revenue increase to $26.3 billion. AWS continues to show robust growth, with operating income rising 72% from $5.4 billion to $9.3 billion. In the North American market, sales grew by 10% to $90 billion, with international sales growing by 7% to $31.7 billion.
Capitalizing on AI and Advertising
Amazon is well-positioned to capitalize on two major growth areas: artificial intelligence (AI) and advertising. Its AI initiatives include developing AI chips like Trainium and Inferentia, which are crucial for handling large data sets and computations. These chips are seeing significant demand, which the company plans to meet with increased capital expenditures (capex) in the second half of the year.
Advertising is another area showing promise. Amazon's advertising revenue grew by 20% to $12.8 billion. The company plans to integrate more advertising into its Prime Video service, supported by a recent 11-year deal with the NBA. This deal is expected to attract more viewers and advertising dollars to Amazon's streaming service.
Should You Buy the Dip?
While Amazon's opportunities in AI and advertising are promising, the company's valuation remains a point of concern. It trades at a forward price-to-earnings (P/E) ratio of nearly 28, which is considered high given the slowdown in revenue growth. Compared to competitors like Microsoft, which has gross margins near 70%, Amazon's margins are under 50%, partly due to higher fulfillment costs.
For investors considering entering the market, starting with a small starter position in Amazon might be wise. This allows you to benefit from potential growth while having room to increase your investment if the stock's valuation becomes more attractive due to further market dips.
