Second-quarter earnings season is about to hit the ground running, and to say investors will be sitting on the edge of their seats may be an understatement. One company that's caught in the underlying economic tug-of-war is Amazon (AMZN 0.49%).
On the one hand, many of the products on the digital retailer's platform are sourced from around the world, so it's particularly vulnerable to the Trump administration's tariff agenda. On the other hand, the company's digital advertising business and its cloud segment -- Amazon Web Services (AWS) -- stand to gain from accelerating adoption of AI, which could be a significant catalyst for growth.
The company faces a key hurdle when Amazon reports its second-quarter results, which are expected to be released on July 31. Given the competing economic forces at play, should investors buy Amazon stock ahead of this key financial report or wait until the results have been made public? Let's take a look to see what the evidence suggests.
Image source: Getty Images.
Will digital retail take a hit?
One of the biggest unknowns in the upcoming quarter is the impact of tariffs. Third-party merchants account for roughly 62% of unit sales, and many of those sellers source their goods from China. The U.S. announced a trade deal with China last month that set tariffs on Chinese goods at a minimum of 30%, though the levies on some products are higher. While this is down from the peak of 145%, the timing of the deal in early June suggests Amazon's second-quarter sales and profits will likely take a hit.
However, the company expanded its Prime Day sale to four days, double the length of its member-only sale last year, which could boost sales. Unfortunately, the event began after the close of the second quarter, so the impact on any additional sales won't hit the financials until Q3.
Results from the first quarter came in before the imposition of tariffs, and investors liked what they saw. Overall net sales increased 9% year over year to $155.7 billion, with 60% of its revenue coming from digital sales or third-party seller services. Investors will be watching closely to gauge the impact of tariffs on Amazon's biggest business.
Head in the clouds
The news isn't all bad, as the breadth of Amazon's business will insulate the company somewhat from the trade war, starting with its cloud segment. AWS is the undisputed leader in cloud infrastructure services, controlling 32% of the market in the first quarter and growing 17% year over year, according to market analyst Canalys. It's also Amazon's biggest moneymaker, generating 19% of revenue and 63% of operating income.
Growth has reignited over the past year or so, fueled by demand for AI. Last month, CEO Andy Jassy noted that Amazon had more than 1,000 generative AI services and applications in progress or built, with plans to develop many more, saying, "AI will be a substantial catalyst." This, in turn, could drive higher demand for AWS.
It all "ads" up
Let's not forget Amazon's advertising, which has quickly become the company's fastest-growing business. Ad revenue grew 18% year over year in Q2, fueled by Amazon Prime and the company's live sports programming. Recent reports suggest marketers are moving millions in ad spending to Amazon's platform, according to advertising industry publication Adweek.
Amazon's advertising business began as a way for the company to capitalize on the valuable digital real estate on its e-commerce platform, but has since expanded significantly. Earlier this year, advertising on Prime Video became standard, with users required to pay a $3 monthly fee to forego the ads. The company also gets ad revenue from Freevee, its other ad-supported streaming channel, and from Twitch, its live-streaming gaming platform.
Amazon sought to expand its advantage, inking a groundbreaking deal with Roku to give advertisers "access to the largest authenticated CTV [connected TV] footprint in the U.S.," available exclusively through the Amazon Demand-Side Platform (DSP), which connects ad buyers with available advertising. Roku and Amazon reach combined reaches an estimated 80 million CTV households, which represents more than 80% of CTV households in the country, according to the press release. This could be a significant catalyst for ad growth going forward.
To buy or not to buy
I generally don't recommend making buying decisions based on arbitrary days on a calendar, but rather the totality of the circumstances and the opportunities that could fuel revenue and profit growth. Each of Amazon's major business segments is growing at a respectable clip, and the proliferation of AI could act as an ongoing catalyst.
Wall Street is nearly unanimous in its bullish view of Amazon. Of the 70 analysts who have offered an opinion in July, 66 -- a whopping 94% -- rate the stock a buy or strong buy, and none recommend selling. Furthermore, the average price target of $242 suggests there's additional upside of 8% compared to Friday's closing price.
However, just this week, analysts at Morgan Stanley lifted their price target on Amazon to $300, which represents 33% potential upside for investors. The analysts called Amazon a "top pick" and cited more manageable tariffs, cloud growth, and strength across its AI offerings as fueling the firm's bullish call.
Amazon is the undisputed leader in e-commerce and cloud infrastructure services and a key player in digital advertising. Add to that the company's portfolio of AI offerings, and it's easy to see why Wall Street is so bullish on Amazon's future.
On a final note, Amazon is currently selling for roughly 37 times trailing-12-month earnings. While that's a premium, it's well below the stock's three-year average multiple of 83, so from a historical standpoint, it's a bargain. I'd suggest that's a reasonable price to pay for a stock that gained 95% over the past three years, far exceeding the 61% gains of the S&P 500.
For those reasons and more, Amazon stock is a buy.
