Is Amazon Stock a Buy?

Amazon's (AMZN 0.78%) stock dipped after the e-commerce and cloud giant posted its third-quarter results on Oct. 28.

Its total revenue rose 15% year over year to $110.8 billion, but missed analysts' estimates by $850 million. Its net income tumbled 49% to $3.2 billion, or $6.12 per share, which also missed expectations by $2.81.

For the fourth quarter, Amazon expects its revenue to rise 4%-12% year over year, compared to analysts' forecasts for 13% growth. It expects its operating income to drop 57%-100% as higher labor costs, inflation, supply chain disruptions, and its rising digital media investments all squeeze its margins.

Image source: Amazon.

Those headline numbers were ugly, but does Amazon's post-earnings sell-off actually represent a buying opportunity for long-term investors?

Amazon's post-pandemic slowdown

Amazon experienced accelerating growth throughout the pandemic as more people shopped online. The surging usage of cloud-based services also fed the growth of its cloud infrastructure platform Amazon Web Services (AWS).

In 2020, Amazon's revenue rose 38%, its operating margin expanded 70 basis points to 5.9% (even as it grappled with higher COVID-19 expenses), and its earnings per share (EPS) increased 82%. However, that momentum faded over the past three quarters as more businesses reopened:

Source: Amazon. YOY = Year over year.

To address those unfavorable year-over-year comparisons, Amazon highlights its two-year compounded annual growth rate (CAGR) as a clearer measure of its long-term growth. In the third quarter, Amazon's total revenue still rose at a two-year CAGR of 25% -- compared to a low 20% growth rate before the pandemic -- so its business is still expanding.

Amazon's core growth engines are still growing

Amazon's online store revenue only rose 3% year over year to $49.94 billion in the third quarter. The bears might point to that figure, which faced a tough comparison to its 37% growth a year earlier, and claim that Amazon's high-growth days are over.

However, Amazon's other four growth engines -- namely its third-party marketplace, its subscription services, AWS, and its advertising business, which accounts for most of its "other" revenue -- all still generated double-digit revenue growth during the third quarter:

Source: Amazon. YOY = Year over year.

Together, these higher-growth businesses generated 51% of Amazon's revenue -- up from 46% of its revenue in the prior-year quarter.

Investors should also recall that AWS generates much higher-margin revenue than Amazon's retail businesses, so it actually accounts for most of Amazon's operating profits. During the third quarter, AWS' operating income increased 38% year over year to $4.88 billion -- more than 100% of Amazon's total operating income -- as it offset a combined operating loss from its North American and International retail businesses.

AWS' stable revenue growth indicates it will continue to maintain its lead against Microsoft's (MSFT 0.25%) Azure in the cloud platform market, while its consistent operating profit growth should partly offset Amazon's planned $5 billion increase in operating expenses for its retail ($4 billion) and digital media ($1 billion) businesses in the fourth quarter.

Is it the right time to buy Amazon?

Analysts expect Amazon's revenue and earnings to rise 23% and 26%, respectively, for the full year. Next year, they expect its revenue to increase 18% with 25% earnings growth as its year-over-year growth stabilizes.

We should take those estimates with a grain of salt, but we've seen Amazon go through plenty of higher spending cycles in the past. Each time Amazon says it will ramp up its spending, it attracts some bears who claim it's losing its momentum without considering that the company still leads the high-growth e-commerce and cloud infrastructure markets.

It's generally a red flag when a market underdog boosts its spending to catch up to the market leaders, but it's a sign of strength when a market leader like Amazon increases its spending to maintain its dominance. So as someone who started accumulating shares of Amazon six years ago, I'm not too worried about the company's latest sales slowdown or its spending uptick at all.

After its latest pullback, Amazon's stock trades at less than 50 times forward earnings and just three times next year's sales. That's a bargain compared to many other high-growth e-commerce and cloud stocks, and I believe Amazon's stock could still head much higher over the next few years.