This ‘Magnificent Seven’ stock looks like a steal in the middle of the sale

There is a lot of fear in the stock market this week. Technology stocks sold off strongly, while safe-haven stocks such as utilities and pharmaceuticals saw increased interest. The Nasdaq entered correction territory, down more than 10% from its recent highs. A relatively weak jobs report (114,000 created vs. 185,000 estimates) has some thinking again about a recession and selling stocks. Many investors get nervous during these events. However, market pullbacks are perfectly normal.

I look forward to these opportunities. Finally, investors can buy stocks at reasonable prices rather than at all-time highs.

Even Magnificent Seven stocks are not immune to a correction. Amazon (AMZN 0.69%) it is trading 20% ​​below its recent high, as shown below.

AMZN data by YCharts

The decline looks like a great opportunity for investors to pick up shares at a great price.

Here’s why.

Were Amazon’s earnings really “bad”?

The market wasn’t happy with Amazon’s second quarter earnings, but I think some have trouble seeing the forest for the trees. Net sales rose 10% to $148 billion in Q2, a slowdown from 13% growth in Q1. This should come as no surprise given the slowdown in consumer spending across the economy. Amazon’s operating income rose 91% from $7.7 billion in Q2 last year to $14.7 billion this year. While this looks great compared to 2023, it is 4% less sequential. Slight slowdown in growth from Q1 to Q2 and renewed recession fears worry Wall Street. But Amazon’s results have been stellar where it matters most: AWS.

AWS is Amazon’s cash cow. The cloud segment accounted for $66 billion in operating profits for the combined 2021-2023 period, 89% of the company’s total operating profit. This is despite a tough 2023, when companies slashed data budgets in anticipation of a recession that never came. But artificial intelligence (AI) is now a massive tailwind for cloud service providers. Generative AI programs require incredible data and processing power, and AWS will be a major beneficiary.

As shown below, AWS revenue growth has accelerated in each of the past three quarters.

Data source: Amazon.

This trend is encouraging and bodes well for Amazon’s long-term results and stock.

Is Amazon stock a buy now?

When evaluating Amazon, I like to look at price-to-sales (P/S) and price-to-cash from operations (CFO). Operating cash, often called operating cash flow, is important because it tells us how much money a company’s core business is generating.

As shown below, Amazon is undervalued by 13% on a sales basis and 75% on a cash flow basis compared to its 10-year averages.

AMZN price to CFO per share (TTM) by YCharts

This is the lowest level traded on a cash flow basis in the past 10 years.

Amazon’s valuation requires looking beyond a simple price-to-earnings (P/E) ratio, but the current P/E ratio of 38 is also the lowest in 10 years.

Amazon’s global sales growth could continue to approach 10%. Management guided for growth of 8% to 11% in the next quarter. However, AWS is the profit center; has AI tailwind and accelerated growth. At times like these, I like to remember two things that Warren Buffett says: “Be greedy when others are fearful” and “the stock market is a money transfer device from the impatient to the patient.” This advice could work well for Amazon investors.