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Amazon’s share price just crashed. Here’s what I’d do now

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Last week, Amazon posted its results for the second quarter of 2021. It’s fair to say the market wasn’t impressed with the numbers. After the results, Amazon’s share price fell nearly 8%.

Should Amazon investors like myself be concerned? Or is this share price pullback a buying opportunity? Let’s take a look.

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Amazon’s Q2 results

Amazon’s Q2 results were pretty solid, in my view. For the quarter, net sales increased 27% to $113.1bn. That’s a healthy level of top-line growth for a company the size of Amazon. That said, analysts had been expecting revenue of $118.9bn, according to data from Refinitiv.

Meanwhile, net income increased 50% to $7.8bn, or $15.12 per diluted share, compared with $5.2bn, or $10.30 per diluted share, in Q2 2020. Wall Street was looking for $12.28 per share so Amazon beat earnings expectations.

One highlight from the Q2 results was growth in the cloud division, AWS. Here, revenue was up 37% for the period to $14.8bn. Another highlight was the ‘Other’ segment, which includes advertising sales. Here, revenue was up a huge 87% to $7.9bn.

Overall, these numbers suggest to me that Amazon continues to have plenty of momentum right now.

Why Amazon’s share price fell

However, the results weren’t perfect. And what spooked Wall Street was the forward guidance. For Q3, Amazon said that it expects sales to grow between 10% and 16% compared with Q3 2020. That level is a little underwhelming by Amazon’s standards.

It’s worth noting however, that Amazon shares have a habit of falling after quarterly results. Over the last 12 quarters, Amazon has beaten earnings expectations on nine occasions and on six of those, the share price has pulled back.

My view on Amazon stock now

After the Q2 results, I continue to see Amazon as a ‘no-brainer’ stock. One reason I’m bullish on Amazon is that the online shopping industry is set to get much bigger in the years ahead. Between 2020 and 2030, the e-commerce industry is expected to grow at around 13.5% annually, according to Research and Markets. This means there’s a massive growth runway for Amazon.

Another reason I’m bullish is the cloud. This industry is expected to grow by nearly 20% per year between now and 2030. AWS had a 40%+ share of the cloud market in 2020, more than double the second-largest player, Microsoft, according to research firm Gartner.

I also like the fact that Amazon is seeing huge growth in the digital advertising space. This is another high-growth industry. Given Amazon’s growth potential, I don’t think investors like myself can afford to ignore the stock.

Risks

Of course, there are risks to the investment case. While Amazon looks set to grow in the long run, it’s likely to experience setbacks along the way. In the short term, growth could slow as the world reopens and consumers return to physical stores.

In the near term, Amazon is also going to need to spend billions of dollars to expand its warehouse and delivery system. This could weigh on profitability.

Amazon’s valuation is another risk to consider. Currently, it sports a forward-looking P/E ratio of 62. That high valuation has a lot of growth priced into it. If future growth is disappointing, the stock could fall further.

Overall however, I think Amazon offers an attractive long-term risk/reward proposition. I see the recent share price weakness as a buying opportunity.

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Edward Sheldon owns shares in Amazon and Microsoft. The Motley Fool UK owns shares of and has recommended Amazon and Microsoft. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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