I won’t be the first person to suggest that Amazon (NASDAQ:AMZN) stock looks like a great buy following its earnings miss.
After all, it’s fairly easy to imagine that the strongest e-commerce company in the world won’t be kept down for long.
One of the first things to note about the earnings “disappointment” is that it is subjective.
That’s true of all disappointments, what disappoints some is a success to others. Let me explain as it relates to Amazon.
Amazon released its Q2 earnings report on July 29. By July share prices had dropped 7.6% to $3,327.59.
The e-commerce giant posted $113.1 billion in second-quarter profits, up 27% over the $88.9 billion it posted in Q2 last year. Objectively speaking, that 27% increase looked like a strong showing for the company.
However, analysts were anticipating $115.4 billion in Q2 revenues out of Amazon. Therefore, based on Wall Street’s opinion, Amazon disappointed in the second quarter. Amazon shares dropped as a consequence. And that’s fine, it is to be expected. That $2.3 billion shortfall in realized vs. expected revenues isn’t inconsequential.
The company projects that in the third quarter operating income will fall between $2.5 to $6 billion. Even at the highest end of that range it will be less than the $6.2 billion the company recorded in Q3 2020.
But Amazon also saw net income increase 50% to $7.8 billion in the quarter on a year-over-year basis. That is the part of the bull thesis that emerges out of this disappointment.
Amazon’s revenues increased 27%, net income rose 50% to $7.8 billion and the company remains a dominant cloud force.
AWS and AMZN Stock
It would be fair to assert that investors judge Amazon too much by its e-commerce performance. Investors are curious to know how the transition out of the pandemic will affect the company.
CFO Brian Olshansky said he expects sales results to stabilize as people get out following outsized growth earlier in the pandemic. That causes investors to wonder if AMZN stock could go sideways or worse.
I wouldn’t worry there. Q3 revenue guidance forecasts between 10%-16% growth over the third quarter of 2020. Sales are projected to reach between $106 and $112 billion.
Even if e-commerce sales growth slows relative to pandemic rates, the company has other strengths, namely, AWS. AWS is growing from its already dominant position. That should help to balance the e-commerce growth slowdown during the transition back to normalcy.
The Bottom Line
Amazon Web Services revenue growth outpaced overall revenue growth at Amazon. AWS brought in $14.8 billion in revenues in Q2. That figure represents 37% growth year-over-year. Remember, overall revenues grew by 27%.
The same narrative holds true for international revenues. In the second quarter, they increased by 35.53% on a year-over-year basis. So, it’s fair to state that Amazon is balancing a transition in revenue sources.
North American growth is (and has been) the laggard. Revenue growth there was only 21.85%, lower than the overall 27% revenue growth at the company.
Investors really shouldn’t worry because the overall picture is one of strength. The company missed Wall Street’s revenue expectations for the quarter by 2%.
If investors are swayed by high-level figures such as those, they could just as easily have found optimism in two other high-level figures: first-half revenue growth and net income.
Amazon recorded $221.6 billion in revenue in the first half of this year. That’s 34.8% greater than last year. Net income more than doubled to $15.885 billion in the same period.
All of these numbers look positive, the slight earnings “disappointment” aside. That’s why the narrative now surrounding AMZN stock is one of opportunity rather than disappointment.
On the date of publication, Alex Sirois did not have (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.