What happened to the stock price of Amazon after the financial report? Can they make a comeback in the future?

After Amazon (NASDAQ: AMZN) announced its latest second quarter performance, the market reacted unfavorably, and its stock price continued to decline after the announcement. Will this downward trend continue, and how should we consider our investment behavior? This requires a more careful study of its fundamentals for a specific evaluation.

The highlight of the company's earnings in the first quarter of 2024 is strong revenue, which is 27.5% higher than the upper limit of the guidance range. As a result, the operating margin looks particularly healthy, at 10.7% (Q1 2023: 3.7%).

There are obvious risks to Amazon's future profit margins, specifically three challenges: the intensifying competition from PDD Holdings (NASDAQ: PDD) subsidiaries like Temu, the slowdown in growth in Amazon's large US market, and the rising cost pressures from labor expenses. However, in the first quarter of 2024, the company clearly performed well despite these risks. The healthy expected growth in net sales and the stock's P/E ratio in the second quarter of 2024 also make Amazon attractive.

Against this backdrop, let's now take a look at the latest data for the company to assess whether the price decline will continue.

From the beginning, there are clear reasons for the recent price decline, which are evident in some weak data. However, at the same time, these reasons for the decline also have counterarguments. The reasons (and their counterarguments) are as follows.

On the downside:Although Amazon's net sales in the second quarter of 2024 increased by 10.1% year-on-year, this growth was still the lowest in the past five quarters. This is related to increased competition and risks in the US market. Specifically:

Although PDD Holdings' revenue is still a small part compared to Amazon, this proportion may increase to 9.3%. This proportion was 8.3% in the first quarter of 2024 and 6% for the full year 2023.

Although the trend of slowing US economic growth was reversed in the second quarter of 2024, consumers remained cautious during this quarter. The year-on-year growth of retail sales continued to decline throughout the quarter. It is worth noting that even the consumption expenditure growth calculated according to the GDP report is 2.3%, which is lower than the overall economic growth of 2.8%.

In addition, the company's revenue growth was also lower than analysts' average expectations, with a year-on-year increase of 10.7%. This is the first unexpected decrease in revenue for the company in seven quarters.

Reasons for the increase include:However, there is still room for sales growth in the third quarter of 2024. The guidance range is 8-11%, higher than the 7-11% in the second quarter of 2024. It is worth mentioning that analysts' average expectations are biased towards growth, with a year-on-year growth expectation of 10.1%. This means that growth can maintain the level of the previous quarter.

In addition, even if the growth rate reaches the midpoint of the guidance range at 9.5%, the year-on-year net sales growth for the first nine months of this year (first nine months of 2024) will still reach 10.7%, which is slightly lower than the 11% year-on-year growth for the first nine months of 2023 and the compound annual growth rate (CAGR) for the past three years. In other words, sales growth has hardly slowed down.

Downside Reasons:From a sequential perspective, the pressure on the operating margin has become more evident. It decreased from 10.7% in the first quarter of 2024 to 9.9% in the second quarter of 2024. Assuming the company's net sales and operating revenue reach the midpoint of the guidance range in the third quarter of 2024, the margin may further decrease to 8.5%.

In addition, the revenue data shows the slowest growth in five quarters. However, with a year-on-year growth of 91%, there is nothing to complain about. However, it is worth mentioning that even the absolute revenue of 14.7 billion USD is lower than the first quarter of 2024 (see chart below), marking the first consecutive decline in seven quarters.

Although the company has issued such a warning in its guidance for the second quarter of 2024, this is still frustrating.

Upside Reasons:From a broader perspective, the operating margin actually looks quite strong compared to the same period last year. The operating margin in the second quarter of 2023 was 5.7%, while the latest quarter's operating margin is 9.9%. The operating margin for the first half of 2023 was 4.8%, while the operating margin for the first half of 2024 was 10.3%.

In addition, if the operating revenue in the third quarter of 2024 reaches the highest end of the guidance range, the margin will be 9.7%. This is not significantly different from the previous quarter's figure, and it is significantly higher than the 7.8% margin in the third quarter of 2023. Considering that the margin in the second quarter of 2024 is slightly higher than the upper end of the guidance at 9.8%, due to surpassing the guidance in terms of revenue, this is entirely possible.

Encouragingly, all three divisions of Amazon have contributed to the improvement in margin. Of course, AWS is still the key division, with a margin of 35.5% in the second quarter of 2024 (compared to 24.4% in the second quarter of 2023). On the other hand, while the North American and International divisions are still lagging behind, their margins have also increased. In the second quarter of 2024, the margin in North America increased to 5.7% (compared to 3.9% in the second quarter of 2023), while the margin in the International division was approximately 1% compared to the loss of the previous year.

The profit margin is also supported by operating expenses, with a year-on-year increase of 5.2% in the second quarter of 2024. This number is higher than the year-on-year increase of 4.4% in the first quarter of 2024, but significantly lower than the year-on-year increase of 7.5% in the second quarter of 2023. In addition, considering the possibility of labor costs rising, even a relatively moderate continued acceleration is positive.

The growth in revenue is also reflected in net income. The company's diluted earnings per share ('EPS') increased by 95.5% year-on-year in the second quarter of 2024 and by 137.1% year-on-year in the first half of 2024.

Even if the annual figure only doubled from the first half of 2024 ($2.3), the annual EPS growth slowed significantly to 58.6%, and the expected price-to-earnings ratio ('P/E') still looks good at 36.5 times. This is lower than the level of 41.3 times a few months ago and the five-year average of 46 times.

But if EPS continues to grow at the rate of the first half of 2024, the expected P/E ratio could be even better. The EPS figure will reach $6.9 and the P/E ratio will reach 24.4 times. But even if this number is in the middle of the two possibilities, AMZN still has more than 50% upside potential.

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In short, although Amazon's stock price has fallen after the release of its financial report, its upside potential is also apparent. The biggest advantage is that overall, both revenue growth and operating margin are very good, and this state can still be maintained in the next quarter.

This supports the view that even if the growth rate of EPS slows down from the first half of 2024, EPS will still continue to grow strongly by the end of 2024. At least, AMZN now has a 25% upside potential and there is still room for growth in the future.