While Amazon (AMZN -0.96%) crushed second-quarter earnings expectations, the company's cautious outlook sent shares spiraling lower. The drop sent the shares into negative territory on the year, as of this writing.
Let's take a closer look at the e-commerce giant's latest results and guidance to see if this dip is a buying opportunity or if investors should run for the hills.
Outlook spooks investors
Amazon's cloud computing business, Amazon Web Services (AWS), is the company's largest segment by profitability and its fastest-growing. In the quarter, the segment grew its revenue by 17.5% to $30.9 billion, while operating income rose 10% to $10.2 billion. That was above the $30.8 billion revenue consensus, as compiled by StreetAccount, but trailed the growth of Microsoft's Azure and Alphabet's Google cloud.
Amazon continues to be the market share leader in the cloud computing space and is investing heavily there. However, like others in the space, it is seeing constraints with demand exceeding capacity. Meanwhile, the company highlighted its custom artificial intelligence (AI) chips as having an edge in price performance.
Amazon is leaning into the next wave of AI innovation: AI agents. While interest in AI agents is surging, many companies either lack the tools to build them or struggle to safely deploy them in production. To address that, Amazon introduced Strands -- an open-source framework for building AI agents -- and Agentcore, a secure, serverless environment to run them at scale. It's also rolling out AWS Transform, a specialized AI agent designed to help customers modernize legacy systems like mainframes and accelerate cloud migrations.
On the consumer side of its business, Amazon's North America sales jumped 11% to $100.1 billion, while international sales climbed 16%, or 11% in constant currencies, to $36.8 billion. Operating income for its North America segment surged 47% to $7.5 billion, while its international segment posted operating income of $1.5 billion versus $0.3 billion a year ago.
Advertising services continue to be a growth driver, as revenue soared 23% to $15.7 billion, driven by its sponsored ad business. That was ahead of the $14.9 billion analyst consensus, as compiled by StreetAccount.
Third-party seller services revenue rose by 11% to $40.3 billion, while online store revenue climbed by 11% to $61.5 billion. Physical stores, such as Whole Foods and Amazon Fresh, saw sales grow by 7% to $5.6 billion. Subscription services revenue, meanwhile, jumped 12% to $12.2 billion.
Overall, Amazon's revenue climbed by 13% to $167.7 billion, which came in well above the $162.1 billion analyst consensus, as compiled by London Stock Exchange Group (LSEG). Adjusted earnings per share climbed 33% to $1.68, which was also well ahead of analyst expectations of $1.33.
Looking ahead, Amazon forecast Q3 revenue to be between $174 billion and $179.5 billion, representing 10% to 13% growth. Meanwhile, it guided for operating income to be between $15.5 billion to $20.5 billion compared to $17.4 billion a year ago. Analysts were looking for operating income of $19.5 billion (StreetAccount) on revenue of $173.1 billion (LSEG).
Image source: Getty Images.
Should investors buy the dip?
Amazon has been nicely growing its revenue, led by AWS and its sponsored ad business. However, a just as important -- if not more important -- part of the story has been the operational efficiency it has seen in its e-commerce business.
That showed up in Q2 via its e-commerce operating income, but investors were disappointed with its operating income guidance. The company is investing heavily in AI infrastructure for AWS, which is leading to some higher depreciation costs. At the end of the day, this investment is needed and will benefit the company, although it will weigh on profitability in the near term.
Turning to valuation, the stock trades at a forward price-to-earnings ratio of about 34 times 2025 analyst estimates and 29 times 2026 estimates. That's a historically attractive valuation for the stock, and Amazon has often performed well when it invests heavily.
As such, I'd use this pullback as a buying opportunity.
