Amazon stock (AMZN) plunged following the release of its Q2 results. This drop can likely be attributed to Amazon’s projection for Q3 net sales of $154.0-158.5 billion, with the midpoint falling short of the $158.43 billion consensus estimate. That said, the e-commerce and cloud computing giant showed significant improvements across its retail division, AWS cloud services, and overall profitability and free cash flow (FCF). In the meantime, the post-earnings dip and the recent overall market sell-off have led to Amazon shares trading at attractive levels. Thus, here are four reasons why I remain bullish on the stock.
Reason #1: Robust Performance in Retail Division
The first reason I remain bullish on Amazon is its continued strong performance in the retail division. This division used to weigh down on Amazon’s investment case in prior years, yet it has consistently shown strong top- and bottom-line momentum in recent quarters.
In Q2, retail revenue from the North American segment increased by 9% year-over-year, reaching $90 billion, while International revenue rose by 10% in constant currency, totaling $31.7 billion. This growth was accompanied by notable improvements in operating margins. The North American retail segment’s operating margin rose to 5.6%, up from 3.9% a year ago, reflecting Amazon’s improved cost efficiencies and better inventory management.
Specifically, the company reduced fulfillment costs and achieved more efficient delivery operations due to higher delivery volumes. Management highlighted that Amazon’s commitment to offering low prices and an extensive selection continues to attract customers, resulting in over five billion units being delivered either the same day or the next day. Management also mentioned that new Prime benefits, such as free restaurant delivery and expanded pharmacy services, are expected to further bolster customer loyalty and support margin growth.
Reason #2: AWS Growth Acceleration Impresses
The second catalyst that supports Amazon’s bullish case is the acceleration in the company’s cloud division. In particular, AWS revenue grew by nearly 19% year-over-year to $26.3 billion, with this growth marking an acceleration from the previous quarter’s growth of 17% and last year’s growth of 12%. This growth is a testament to the increasing adoption of cloud services and the rising demand for Amazon’s AI solutions.
Further, AWS also saw a significant improvement in operating margins, which expanded to 35.5% from 24.2% a year ago. AWS’s investments in custom silicon, such as Trainium and Inferentia chips, fueled this margin expansion, as they have improved the cost efficiency of cloud operations and provided better performance for AI workloads.
Reason #3: Superb Profitability Improvements, Surging Free Cash Flow
As I highlighted earlier while discussing Amazon’s retail and AWS divisions, both segments experienced margin expansion during the quarter. In addition, Amazon achieved remarkable profitability improvements and a surge in free cash flow.
The company posted an operating income of $14.7 billion, a dramatic 91% increase from the previous year. Further, trailing 12-month free cash flow, adjusted for equipment finance leases, reached $51.4 billion, an unreal 664% increase year over year.
Reason #4: A Cheap Valuation
With Amazon shares registering a sharp decline recently against the company’s surging free cash flow, it seems that the stock is now trading at a relatively cheap valuation. Following the free cash flow jump seen in Q2, Amazon seems to remain on track to reach $100 billion in free cash flow by the end of Fiscal 2026. Consensus estimates now project free cash flow of $54.0 billion, $73.8 billion, and $99.7 billion for FY2024, FY2025, and FY2026, respectively.
These figures imply P/FCF multiples of 31.5x and 17.1x with respect to FY2024 and FY2026, respectively, with both multiples suggesting that Amazon is attractively priced, given how fast free cash flow is expected to grow.
In the meantime, Amazon is trading at a forward P/E of 31.5x. For context, the last time Amazon stock traded with such a low forward P/E was in 2010. I believe this multiple further underscores the stock’s cheap valuation, especially with consensus estimates projecting a compound annual growth rate of 23.5% in EPS over the next five years.
Is AMZN Stock a Buy, According to Analysts?
Despite the stock’s recent dip, Wall Street maintains a Strong Buy consensus rating on Amazon. This is based on 41 Buys and one Hold assigned in the past three months. At $223.58, the average Amazon stock forecast implies 38% upside potential.
If you’re uncertain about which analyst to follow for trading AMZN stock, the most successful one over the past year is Rob Sanderson from Loop Capital Markets. He has achieved an average return of 29.93% per recommendation and a 79% success rate. For more details, click on the image below.
The Takeaway
In conclusion, despite the recent dip in Amazon’s stock price due to what seems to be conservative Q3 sales projections, the company’s strong retail results, accelerating AWS growth, and superb profitability improvements form a compelling bull case. In the meantime, Amazon’s valuation looks quite appealing, both from the perspective of free cash flow growth and its forward P/E ratio, suggesting the current stock price marks an attractive entry point.
