Should Investors Buy the Drop in Amazon Shares After Shares Plunge on Missed Earnings?

August may have only just begun, but it’s already been a tough month for Amazon (AMZN 0.69%) shareholders. Shares initially sank after the e-commerce giant missed analysts’ revenue estimates when it reported its second-quarter results.

Meanwhile, stocks continued to fall, caught up in the global market selloff. A small interest rate hike in Japan and the unwinding of the carry trade appear to be some of the reasons behind the recent market weakness.

Let’s take a closer look at Amazon’s latest results to see if the selloff is a good opportunity to buy the stock.

Second quarter results and guidance fail to impress

When it comes to earnings, how a stock reacts is often related to expectations of outcomes. If a company misses analyst estimates for a key metric or issues guidance below analyst expectations, the stock will often feel short-term pressure.

While Amazon posted a solid 10% revenue increase in its second quarter, its $148 billion in sales fell short of analysts’ expectations for $148.6 billion in revenue. Meanwhile, it forecast its third-quarter sales to rise 8% to 11% to between $154 billion and $158.5 billion. However, the $156.4 million midpoint of that range was far short of the $158.2 million analyst consensus.

The company’s cloud computing segment, AWS, led the way with a 19% increase in revenue to $26.3 billion. Meanwhile, AWS’s operating income rose 72% from $5.4 billion to $9.3 billion.

North American sales rose 10% to $90 billion, while international sales rose 7% to $31.7 billion. Advertising services led the way with a 20% increase in revenue to $12.8 billion. The company is bullish on the prospects of incorporating ads into its Prime Video service and just inked an 11-year deal with the NBA to stream live games. Meanwhile, subscription services revenue rose 11% to $10.9 billion.

Third-party vendor services revenue rose 13% to $36.2 billion. Online stores posted a sales increase of just 6% to $55.4 billion, while brick-and-mortar stores posted a 4% increase in sales to $5.2 billion.

Like its cloud computing competitors, Amazon plans to spend heavily to continue building the infrastructure needed to support the growing demand for artificial intelligence (AI) as well as non-AI workloads. As a result, capital expenditure in the second half (capex) will be higher than in the first half.

Amazon is also continuing to promote its new AI chips, Trainium for training and Inferentia for inference, which will have next-generation versions released later this year. According to management, there is high demand for the chips given their price performance.

Is it time to take a dip in the Amazon?

Amazon has a number of strong opportunities ahead. First and foremost is AI, and the company is attacking this opportunity on multiple levels, from cloud computing to its own AI chips to offering large language model (LLM) services.

Advertising is another big opportunity, and this area saw strong growth in the second quarter. Sponsored product ads are currently Amazon’s biggest source of ad revenue, but it will start bringing more advertising to its Prime Video service as well. Meanwhile, its deal with the NBA will no doubt bring a lot of interest and advertising dollars to its streaming service.

One knock against Amazon is its rating. The stock currently trades at a forward price-to-earnings (P/E) ratio of nearly 28, based on analyst estimates in 2025. While this is down from historical P/E levels, the company’s revenue growth has slowed since- over the years.

AMZN PE report data (1 year ago) by YCharts

Given its revenue growth and gross margin profile, I’d consider Amazon’s current valuation a bit higher. Amazon’s gross margins are much lower than a software company’s. For example, Microsoft has gross margins of nearly 70%, while Amazon’s are under 50% and around 31% when including fulfillment costs.

Given the recent general market weakness, I would most likely take a small starting position in Amazon given the opportunities ahead, while looking to add more if it continues to sell off and its valuation becomes more attractive .