Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your experience. Save up to 40% More details

Amazon's Q2 Earnings Show Why Stock Remains A Long-Term Buy

By Vincent MartinStock MarketsAug 02, 2022 16:58
Amazon's Q2 Earnings Show Why Stock Remains A Long-Term Buy
By Vincent Martin   |  Aug 02, 2022 16:58
Saved. See Saved Items.
This article has already been saved in your Saved Items
  • Fundamental analysis suggests Amazon stock is ridiculously priced—but broad fundamentals here don’t tell the whole story
  • Three key metrics are worth considering
  • Simply put, this is one of the best businesses in the world. It’s logical that investors continue to pay up to own it

At first glance, (NASDAQ:AMZN) looks ridiculously overvalued. At current price of $135.10, the Seattle-based online retailer has a fully diluted market capitalization of around $1.44 trillion—a valuation hardly supported by fundamental metrics.

AMZN Daily Chart
AMZN Daily Chart

Free cash flow certainly doesn’t do it. Over the past four quarters, Amazon’s free cash flow has, in fact, been negative. Net profit at least is positive, but at $1.13 per share, implying a price-to-earnings multiple well past 100x.

Furthermore, mark-to-market accounting related to the company’s investment in electric truck manufacturer Rivian Automotive (NASDAQ:RIVN) has affected Amazon’s results over the past three quarters. Still, the total net effect has been essentially zero.

Even revenue doesn’t look that spectacular. A 2.5x price-to-revenue multiple is not terribly attractive, given the bulk of revenue comes from low-margin product sales. Meanwhile, the company’s top-line growth has slowed dramatically: revenue increased just 7% year-over-year in both the first and second quarters.

At the least, from a high level, AMZN looks like an avoid. From the right angle, particularly after a double-digit rally following last week’s earnings report, the stock seems like an easy short.

But this is a case where broad fundamental metrics don’t tell the whole story—or enough of the story. It takes a closer look to understand the real value here and why AMZN stock might well be undervalued rather than overvalued.

Metrics Underscore The Bull Case

Again, the headline numbers don’t look great. But three more specific figures highlight the value here.

First, Amazon Web Services (AWS), the company’s cloud business, has generated a stunning $22.4 billion operating income over the past four quarters. (It’s worth noting that the figure includes the unit’s share of corporate costs, which isn’t the case for many companies that report a segment-level profit.)

Apply a 21% tax rate to that figure, and AWS would generate a net income of about $17.7 billion. That’s with profit growing at a 28% rate year-over-year in Q2, with that growth decelerating from previous quarters.

There is debate about what a standalone AWS would be worth. Whatever the exact figure, it’s not difficult to argue that AWS supports at least half the valuation here; a 40x price-to-earnings multiple for 28% growth is not unreasonable, even in a market less aggressive than it was six months ago.

At the very least, AWS is one of the best businesses in the world, full stop. Bear in mind that the business retains a dominant market share while competing against Alphabet (NASDAQ:GOOGL) and Microsoft (NASDAQ:MSFT), two of the best operators out there.

The second metric concerns Amazon’s advertising business: in the second quarter, Amazon generated $8.7 billion in advertising revenue. Over the past 12 months, ad sales have totaled $34 billion. To put that into context, that figure is almost triple the total revenue at Twitter (NYSE:TWTR), Snap (NYSE:SNAP), and Pinterest (NYSE:PINS) combined.

Amazon is an advertising behemoth. And while online ad sales seem to be stagnating, Amazon’s revenue stream rose a healthy 18% year-over-year in Q2.

Finally, there’s the subscription revenue stream. That revenue—mostly from Prime subscriptions—has totaled $33 billion over the past four quarters.

There are three massive businesses here—and we haven’t even discussed the actual e-commerce business yet.

Is Amazon Stock Cheap Enough?

Those three metrics have led some investors to argue, notably after AMZN sold off this spring, that the retail business is available “for free.” A 50x earnings multiple on AWS and 10x revenue multiples on advertising and Prime gets the equity value here to about $1.5 trillion,

That case may be a bit too simplistic, to be honest. Both Prime and advertising revenues are included in Amazon’s North American and International segments. Even with those revenues, neither segment has been profitable over the past four quarters. Competition in the cloud infrastructure business raises the risk of lower profit margins and a lower valuation for AWS.

Still, the broad outline makes some sense. The individual parts of Amazon’s businesses quite obviously have real value. What obscures that value on a consolidated basis is that the company continues to invest heavily in the business. Whether content for Prime Video, the move to one-day shipping, or the massive (and expensive) buildout of a world-class fulfillment business, Amazon is not earning the profits it could.

The Long-Term View

And that’s a good thing. AMZN stock has been one of the market’s great success stories because it has successfully re-invested its profits into the business. That, in turn, has led to AWS and more than 200 million Prime subscribers—and, by the way, an obviously valuable e-commerce business.

Amazon’s e-commerce revenue growth has indeed slowed. But difficult comparisons are a big factor. And it’s worth noting that every retail business is seeing massive deceleration. In fact, two of the best ‘omnichannel’ retailers in the U.S., Walmart (NYSE:WMT) and Target (NYSE:TGT) just posted disastrous quarters.

From the outside, it’s impossible to precisely define how much Amazon is investing and how much profit the company could earn if it focused solely on driving near-term profit. But we have a good amount of data to suggest that the figure would be big. This is the best cloud business, one of the best subscription businesses, and, if Q2 results are any indication, perhaps the best e-commerce business.

That’s what investors are paying for. That’s why Amazon is valued at $1.4 trillion. Equity investors aren’t just buying fundamentals. They’re buying a business. Amazon remains one of the best in the world.

Disclosure: As of this writing, Vince Martin has no positions in any securities mentioned.


Looking to get up to speed on your next idea? With InvestingPro+, you can find:

  • Any company’s financials for the last 10 years
  • Financial health scores for profitability, growth, and more
  • A fair value calculated from dozens of financial models
  • Quick comparison to the company’s peers
  • Fundamental and performance charts

And a lot more. Get all the key data fast, so you can make an informed decision, with InvestingPro+. Learn More »

Amazon's Q2 Earnings Show Why Stock Remains A Long-Term Buy

Related Articles

Michael Kramer
Stocks Brace For Impact By Michael Kramer - Aug 09, 2022

The S&P 500 had risen by nearly 1% at the start of the day yesterday, but by day’s end, all the gains were gone, with the index finishing 12 bps. There are now two...

Amazon's Q2 Earnings Show Why Stock Remains A Long-Term Buy

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
Sign up with Email