Less than a month ago, the Amazon (NASDAQ: AMZN) share price touched a new all-time high. But its latest results, released at the end of July, have been a dampener. It has fallen by 11% over the past month, with much of the decline seen since its second-quarter results.
Weak guidance
As a potential investor, I can see why, when I look at its guidance. Amazon expects net sales to grow between 10% and 16% in the third quarter, compared to the same quarter in 2020. This is a sharp decline compared to the 27% increase seen in the latest quarter, indicating that the pandemic boom is winding down.
Even if I try to justify this with a base effect, the argument is not entirely strong. It is true that last year, the numbers looked particularly strong as the company’s services were in high demand during the lockdown. Net sales grew by a whole 40% in the third quarter of 2020 from the year before. But the latest projections do not compare well with 2019 numbers either, when they had grown by 24%.
Odds are stacked against the Amazon share price
The company also expects softer operating income numbers, in the range of $2.5bn to $6bn. Even the top end of this range is lower than the $6.2bn clocked in the same quarter last year. If this guidance does indeed play out, it will be the first time in six quarters that operating income is lower than the corresponding period of the year before.
The company’s 12-month trailing price-to-earnings (P/E) ratio is already elevated, at around 58 times. This is significantly higher than the 36 times ratio for the Nasdaq 100 index as per data from the Wall Street Journal. A slowing in earnings growth indicates that the company’s share price may not have much room to increase in the near future. The contrary, in fact.
If the numbers for the next quarter were to come in at the lower end of the operating income range of $2.5bn, a number I use as a proxy for net earnings, the share price would have to decline by over 12% just to maintain the current P/E ratio. It would have to fall even more to bring the P/E to the average Nasdaq 100 levels.
It is a strong company
However, the company’s earnings may not decline as much, or at all. And if they came in at the top end of the range, no share price adjustment would be required to maintain its P/E levels.
Also, if I forecast Amazon’s full-year earnings based on the lower end of its latest guidance for the next two quarters, its performance is still strong. Its full-year number for 2021 is still 29% higher than it was last year.
Would I buy Amazon shares?
For now though, it appears to me that in August and the next few months, the Amazon share price can remain weak. But I also believe that it is a robust company that may well continue to perform over time. I think it is a long-term buy for me, and dips are an opportunity for me to load up on the stock.
