Amazon Stock Price Falls 7% – Time to Buy AMZN Stock?

Amazon (AMZN) stock was trading over 7% lower in US premarket trading today after markets gave a thumbs down to its second-quarter earnings. Should you buy the dip in the stock?

The earnings season for FAANGs concluded yesterday. It hasn’t been a good earnings season for FAANGs. Netflix, which was the first FAANG to release its earnings slumped on mixed earnings. Among others, Apple and Facebook also slumped after the earnings. While both these companies reported better than expected earnings, markets seem concerned about their outlook.

FAANG earnings

While Apple warned of chip shortage during the earnings release, Facebook said that it expects the growth rates to fall in the second half. Alphabet is the only FAANG stock that rose after its earnings release. It is the best performing FAANG in 2021 while Netflix is the worst performer. After today’s slump, Amazon will become the second-worst FAANG of the year.

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Amazon second-quarter earnings

Amazon released its second-quarter earnings yesterday after the close of US markets. The company reported net sales of $113.1 billion which were 27% higher than the corresponding quarter in 2020. Meanwhile, despite the steep rise, the earnings fell short of the $115.2 billion that analysts were expecting.

Meanwhile, the company’s EPS of $15.12 was ahead of the $12.30 that analysts were expecting. However, its guidance for the third quarter was also lower than expected. The company expects revenues between $106-$112 billion in the third quarter which was below the $119 billion that analysts were expecting. This is the first quarter since the COVID-19 pandemic began when Amazon’s topline growth has disappointed markets.

Amazon’s CFO Brian Olsavsky sees tougher year-over-year comps ahead as the pandemic-driven boost dies down. “We’re starting to lap that and that’s why you see some of the growth rate coming down,” said Olsavsky as he warned of a growth slowdown in the second half of the year.

AMZN growth rates have come down

He candidly admitted that “People are getting out more and doing things besides shopping.” As consumer behavior is slowly reverting to the pre-pandemic levels, we have seen a growth slowdown for stay-at-home stocks like Amazon while outdoor entertainment companies like AMC Entertainment have seen a rise in sales.

Meanwhile, markets have been bracing for a growth slowdown as the high growth rates of 2020 don’t look sustainable. “That’s something we expect to happen because of the extraordinary circumstances of last year,” said JMP Securities analyst Ron Josey.

Amazon operating income

Amazon expects an operating income between $2.5-$6 billion in the third quarter which is below the $6.2 billion that it reported in the second quarter. The guidance assumes COVID-19 related costs of $1 billion and does not factor in any acquisition in the quarter. Looking at the business segments, the company’s North American e-commerce operations posted revenues and operating income of $67.5 billion and $3.15 billion respectively in the second quarter. The sales increased 21.8% during the quarter.

Meanwhile, while the sales in international markets rose 35%. The segment also posted a positive operating income in the quarter. AWS posted revenues of $14.8 billion in the quarter with an operating income of $4.2 billion. The segment is the most profitable for Amazon and the trend continued in the second quarter also.

Amazon stock forecast

Wall Street analysts are bullish on AMZN stock. Of the 50 analysts polled by CNN Business, 48 rate the stock as a buy while two rate it as a hold. None of the analysts have a sell or equivalent rating on the stock.

Its median target price of $4,245 implies an upside of 18% over current prices. Its lowest target price is $3,775 which is a premium of 5% while the highest target price of $5,500 is a premium of 52.8% over current prices.

Analyst’s action

Earlier this month, Mizuho reiterated AMZN stock as a buy. “Although the quarter tracks in line, we remain positive on Amazon’s advertising in 2H on back-to-school and long-term outlook due to the incremental opportunity of demand-side platform which could drive upside of 20% using Google as a proxy,” it said in its note.

Credit Suisse analyst Stephen Ju had also raised his target price from $4,000 to $4,850. He had also upwardly revised the long-term earnings forecasts for Amazon.

Amazon stock long term forecast

Meanwhile, the long-term forecast for AMZN stock looks positive as the shift towards e-commerce and cloud will only accelerate. The company has a market-leading position in both these industries. The stock also forms part of Berkshire Hathaway’s portfolio and chairman Warren Buffett regrets missing the stock in its early days.

AMZN stock technical analysis

Looking at the charts, AMZN stock trades above the 50-day, 100-day, and 200-day SMA. However, considering the pre-market carnage, it looks set to breach the 50-day SMA. The 100-day SMA could be the next support for the e-commerce giant.

All said the dip in Amazon stock looks like a buying opportunity considering the secular growth rates that all its businesses are witnessing. From a valuation perspective also, the stock looks attractive with an NTM PE of 62x.

Amazon stock was trading 7% lower in premarkets trading today. The stock has a 52-week trading range of $2,871-$3,773.08.

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