Similar to its big-tech cohorts, Amazon (AMZN 0.83%) has not been immune to heavy sell-offs during the ever-volatile 2022 market. Fresh off completing a stock split, the company reported second-quarter earnings and illustrated to investors that Amazon is still very much in growth mode.

While the company is primarily known as an e-commerce pioneer, investors can see that Amazon has its tentacles reaching in all directions, from advertising, cloud computing, consumer electronics, and streaming. Let's dig into the company's Q2 2022 earnings report and analyze just how powerful some of these ancillary business segments are.  

A person shopping online.

Image source: Getty Images.

With profits declining, is it time to panic?

For the second quarter, Amazon reported total sales of $121.2 billion and a net loss of $2 billion. By comparison, Amazon's net income was $7.8 billion during the same period in 2021 on sales of $113.1 billion.

Furthermore, the company's total net loss on a year-to-date basis is $5.9 billion, compared to net profit of $15.9 billion during the first six months of 2021. Despite healthy top-line growth, the common denominator is that Amazon has seemingly forfeited its profitability.

As investors, it is paramount that we zoom out and analyze what macroeconomic variables could be impacting Amazon's business and dig deep into each business unit in an effort to try and isolate where the company may be facing headwinds. This table illustrates the growth profiles of each of Amazon's business segments. 

Business Segment Q2 2022 Revenue Q2 2021 Revenue YOY Increase/(Decrease)
Online store sales $50.9 billion $53.2 billion (4%)
Physical store sales $4.7 billion $4.2 billion 12%
3rd-party seller services $27.4 billion $25.1 billion 9%
Subscription services $8.7 billion $7.9 billion 10%
Advertising services $8.8 billion $7.5 billion 18%
Amazon Web Services $19.7 billion $14.8 billion 33%
Other $1.1 billion $0.5 billion 131%

Data source: Amazon. YOY = Year-over-year.

Amazon's online stores are down 4% year over year, equating to more than $2 billion in revenue in terms of absolute dollars. Moreover, while physical stores were up 12% year over year, the incremental revenue in terms of absolute dollars was nominal, considering the total size of Amazon's business.

CEO Andy Jassy addressed these challenges on the earnings call and specifically pointed to labor market constraints and inflationary pressures as the two primary challenges Amazon is fighting at the moment. The boom in sales sparked by the COVID-19 pandemic seems to be behind Amazon, and now the company must navigate how it can generate superior top- and bottom-line growth beyond its core online shopping business.      

Generational transformation takes time

The table above showcases that there is a lot more than meets the eye with Amazon. In addition to its core e-commerce business, the company boasts cloud computing, advertising, and subscription services, all of which are generating healthy growth.

Amazon's cloud unit, AWS, generated $19.7 billion of revenue in Q2, which represented 33% growth year over year. Perhaps more encouraging is that Amazon expanded its margin profile for AWS from 28% in Q2 2021 to 29% in Q2 2022. While 1% may appear small, this expansion contributes meaningful cash flow in a business generating tens of billions of dollars.

Amazon's advertising business reported $8.8 billion in quarterly revenue, up 18% year over year. Investors should keep a keen eye on the company's advertising endeavors. Although Amazon faces fierce competition from the likes of Alphabet and Meta Platforms, the company has turned its advertising switch to a fast-growing, multibillion-dollar revenue stream. While it will continue to take time and capital to capture additional market share from market incumbents, Amazon's position in digital advertising should not be overlooked.   

Perhaps the most lucrative part of Amazon's business is its subscription services, namely Amazon Prime. When the company introduced Prime over a decade ago, the primary selling point was free, two-day shipping for consumers. Over the last 10 years, Amazon has evolved Prime to include music, video streaming, and more. Amazon has produced original content, including films and television series, and is showing no signs of slowing down.

While subscription services were up 10% year over year, Amazon may have just found its next catalyst. Just last week, Amazon announced its intent to acquire robotics manufacturer iRobot. While the integration from the acquisition hasn't started, many on Wall Street believe that Amazon will leverage iRobot's technology in its warehouses, while others believe it is a quicker inroad for hardware innovation under the company's smart-home umbrella, dubbed Alexa. 

Keep an eye on valuation

There is no denying that Amazon has some near-term challenges ahead. So long as inflation weighs on consumer purchasing power and the labor market remains competitive, the company's core e-commerce business will most likely continue to struggle to generate consistent cash flow. However, other aspects of the business are thriving during these volatile market conditions, which should provide investors some level of comfort.

Amazon stock ended Q2 2022 trading at 2.3 times its trailing-12-month sales. By comparison, the company was trading at 4.2 times at the end of Q2 2021. However, as of this writing, Amazon stock trades at 3 times its trailing-12-month sales. This bump is not surprising, given the stock is up 30% over the last month.

While Amazon has seen a nice increase in its stock price recently, its current valuation is hard to pass up. For investors with a long-term mindset, now could be an optimal time to buy Amazon stock, as the company's growth engine appears to be just beginning to work.