Amazon’s stock recently experienced a significant drop following its second-quarter earnings report, which presented mixed results. While the company exceeded expectations in some areas, it fell short in others. This coincided with a broader market sell-off, resulting in a 15% decline in Amazon’s share price from its all-time high.
Despite the recent dip, there are several reasons to consider buying Amazon stock. First, Amazon Web Services (AWS), the company’s most profitable sector, showed better-than-expected momentum. AWS’s year-over-year cloud revenue growth accelerated from 17.2% in Q1 to 18.8% in Q2, driven by AI demand.
This exceeded analysts’ expectations of 17.6% growth. Second, Amazon is generating substantial cash flow. The company’s cash profits from daily operations have reached all-time highs, and its free cash flow remains robust, even after accounting for capital investments in the business, including AWS and AI.
Amazon stock outlook and AWS growth
Third, Amazon’s shares are currently trading at a bargain price. On a free-cash-flow basis, Amazon is nearly the cheapest it has been in a decade, despite its significant investments in AI.
Compared to its historical valuations, the current stock price presents a compelling buying opportunity. Analysts have set mixed price targets for Amazon following the earnings report. While some have lowered their targets due to concerns over weak Q2 revenue and Q3 operating guidance, others have raised their targets, noting that Amazon faces challenges similar to other big tech companies.
Despite the recent decline, Wall Street maintains a Strong Buy consensus rating on Amazon, with 41 Buys and one Hold in the past three months. The average price target of $223.58 implies a 38% upside potential. In conclusion, Amazon’s strong retail results, accelerating AWS growth, and impressive profitability improvements form a compelling bull case.
The company’s valuation, from the perspectives of free cash flow growth and its forward P/E ratio, suggests that the current stock price marks an attractive entry point for long-term investors.
