Amazon’s second-quarter earnings disappointed investors leading to a 2% decline in the stock price on Friday. While quarterly revenue of $63.4 billion was ahead of analyst estimates, EPS of $5.22 fell 36 cents short of consensus. While bad news has historically been a good time to buy Amazon, this time around there may be better opportunities in the future.
These results still showed strong revenue growth across the board, despite the bottom-line miss. The company had very strong growth in operating cash flow to $9.12 billion but also increased capital expenditure to $2.64 billion. North American sales grew 20%, while international sales grew 12%.
AWS posted strong sales, but growth slowed to 37%, its slowest rate in years. The ad business also grew by 37% to $3 billion and promises to become a major contributor to free cash flow going forward.
The earnings miss was largely driven by the amount the company is spending on reducing its shipping time to one day for Prime subscribers.
This is All Part of Amazon’s Strategy
Analysts had mixed views on the results, with some growing cautious about the company’s growth. This has, of course, happened periodically over the last two decades whenever Amazon has missed on a quarterly report.
But no one should be surprised by occasional misses from Amazon. The company’s earnings are often lumpy, and the company has very little interest in trying to beat quarterly estimates, focusing instead on investing for the long term. Last year, CEO and Founder Jeff Bezos, indicated that the company would be investing $800 million a quarter on building out its logistics infrastructure.
By investing in capacity Amazon is growing its market share and making it harder for competitors to build their own e-commerce businesses. This is how Amazon has always grown.
Is This an Opportunity?
Amazon listed at $2.44 in 1997 and has since risen well over 8,000%. Any weakness has always proved to be a buying opportunity, though that is easy to say in hindsight. The time to buy Amazon is when sentiment is negative, and the future seems uncertain. But these results have not resulted in enough uncertainty to create a buying opportunity.
With uncertainty growing around valuations in the tech sector, and the threat of regulatory action, there are bound to be better opportunities to buy Amazon in the future. The large capital expenditure Amazon is making may well result in an even bigger miss or EPS growth slowdown at some point in the next year.
While Amazon continues to execute on its strategy the current price is also not historically very cheap for the company based on several different metrics. Sentiment around Amazon is now mixed, but we are bound to see it deteriorate more at some point in the future. That will give investors a better opportunity to invest.
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