Amazon.com Inc. (AMZN) is jumping following the release of its second-quarter results, which easily beat analysts' estimates. The beat on the bottom line was driven by substantial operating income from Amazon Web Services, and sales in North America. However, even with the big beat, it may not be enough to keep investors happy.
That’s because not all was perfect. The AWS unit had a growth rate of less than 30%, for the first time since 2016. Additionally, that unit also missed analysts' expectations. Overall, Amazon delivered total revenue of $88.9 billion and earnings of $10.30 per share. Analysts had been looking for the company to generate revenue of roughly $81.6 billion, and earnings of just $1.46 per share.
Big Expectations
Amazon came into the results trading at its highest forward price to sales multiple in years at 3.9. It implied that expectations for the stock were extremely high, heading into results. While it is likely to take a few days to find out if investors were genuinely pleased, on the surface, the company does not appear to have disappointed. Beneath the surface, there are a few things that investors could worry about, mostly in the AWS business unit, which continues to see slowing growth.
Amazon's stock vs. its forward price to sales multiple
The AWS unit reported revenue of approximately $10.8 billion versus estimates of just over $10.9 billion, growth of roughly 29%. Even with the slower growth, the unit was still able to deliver operating income of $3.3 billion, which was an improvement of 58% versus the same period a year earlier. The increase in operating income appears to have come from slower spending, with margins rising to 31.1%.
Strong Guidance
Guidance for Amazon's third quarter was strong too, coming in at $90 billion at the mid-point of the range. That was better than estimates for $86.3 billion. Meanwhile, operating income is expected to be at $3.5 billion at the mid-point, which is roughly in line with last year's operating income of $3.2 billion.
Lower Highs
To this point, Amazon's equity has been making a series of lower highs since hitting an all-time high on July 13. It could be a sign that the recent trend in Amazon has changed, and while it may be too soon to know, the price action should tell investors rather quickly, which way the stock is heading. Interestingly, even with the blockbuster results, the equity is having a modest reaction rising by, about 5% to $3,205 around 5:45 ET on July 30, and failing to take out its previous high. It could suggest the big beat had been priced into the results, as the high sales multiple implied.
Amazon technical chart
Should the stock trade lower in the days ahead, and it falls below the uptrend at a price of around $3,000, it could result in a steeper decline to a range of $2,450 to $2,680.
As long as Amazon is able to continue to lean on AWS for earnings growth and can manage to drive meaningful revenue growth from its eCommerce business, then, the stock's best days may still be ahead of it over the long-term.
Michael Kramer is a financial market strategist and the portfolio manager of the Mott Capital Thematic Growth Portfolio.
Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future results.
