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Amazon Is Growing in the Right Places: Investors Want Growth Everywhere

By Parkev Tatevosian, CFA – Updated Aug 4, 2021 at 10:27AM

Key Points

  • Ad revenue nearly doubled for Amazon in the quarter.
  • After the sell-off, the stock is trading near the lowest level it has in five years.
  • Online shopping may drop in the short run as economies reopen, but people will continue shopping more online in the long run.

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The e-commerce giant increased revenue growth in more profitable segments.

Amazon (AMZN 1.23%) reported second-quarter earnings results last week, providing the first in a series of tough quarterly comparisons from the previous year when folks spent more time at home and subsequently used Amazon much more often for shopping. 

As economies are reopening worldwide, folks are spending more time leaving home and doing some of their shopping at brick-and-mortar retailers. The reversal of the stay-at-home trend is likely to make it difficult for Amazon to match revenue growth rates. Interestingly, however, Amazon accelerated revenue growth in two key areas that are more profitable. 

Workers in a warehouse.

Amazon's stock is down 7.5% since announcing earnings. Image source: Getty Images.

Amazon is growing profitable segments 

Revenue growth decelerated in Amazon's North American net sales and International net sales segments, where the operating profit margins are 4.7% and 1.2%, respectively. Meanwhile, revenue growth accelerated in the Amazon Web Services segment, where the operating profit margin is 28.3%. Still, investors were not pleased with Amazon's results, and the stock price was down 7.5% on the day following the release.

Moreover, revenue in the segment that includes advertising increased by 83% in the most recent quarter from the year before. That continues the trend of accelerating growth rates from ad revenue. This could potentially continue as a lucrative source of revenue and profits, as marketers will covet access to 200 million-plus Prime members who have their purchase information on file and have access to fast and free shipping.

Amazon stock traders were not impressed 

Amazon reported two areas of major growth deceleration -- its online store sales and third-party seller services, both of which related to consumer shopping on Amazon.com. The online store sales growth rate fell from 41% in the first quarter to 13% in Q2. Similarly, the third-party seller services growth rate fell from 60% in Q1 to 34% in Q2.

A dropoff in the growth rate was to be expected. It was unrealistic to think Amazon could maintain the elevated sales levels seen during the pandemic. However, investors were hoping for a more modest slowdown. Amazon dampened investor optimism further by guiding third-quarter revenue growth in the range of 10% to 16% and operating income below the level from the year before.

Undoubtedly the next few quarters could continue to be a volatile time for Amazon's stock price as the world adjusts out of lockdowns and economies reopen. While a portion of the boosted shopping online during the pandemic will reverse in the coming months and quarters, the long-run trend is in the direction of more online shopping. It's easy to get caught up in short-term fluctuations, but the trend is certainly in favor of Amazon in the long run. 

The sell-off in Amazon's stock following the less than excellent quarter caused the stock to be trading at a price-to-earnings ratio of 63.35. That is near the cheapest level it has traded for in the last five years. And arguably, the company has never been stronger, with 200 million Prime members, a robust advertising business, and a reaccelerating industry-leading cloud business.

Long-term investors looking for a growth stock and willing to stomach short-term volatility can feel good about the price at which they can acquire Amazon's stock. 

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Parkev Tatevosian owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

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