This week's stock market movement features a lot of fear. Tech stocks sold off heavily, while safe-haven stocks like utilities and pharmaceuticals saw increased interest. The Nasdaq entered correction territory, falling more than 10% off its recent highs. A relatively weak jobs report (114,000 created vs. 185,000 estimates) has some thinking about a recession again and selling stocks. Many investors get understandably jittery during these events. However, market pullbacks are entirely normal.
I look forward to these opportunities. Finally, investors can purchase stocks at reasonable prices rather than at all-time highs.
Even the "Magnificent Seven" stocks are not immune to a correction. Amazon (NASDAQ: AMZN) is trading 20% below its recent high, as shown below.
![https://img.particlenews.com/image.php?url=1W4gmX_0uudpn9Y00](https://img.particlenews.com/image.php?type=thumbnail_580x000&url=1W4gmX_0uudpn9Y00)
AMZN data by YCharts
The downturn looks like an excellent opportunity for investors to pick up shares at a great price.
Here's why.
Were Amazon's earnings actually "bad"?
The market wasn't pleased with Amazon's second-quarter earnings, but I think some are having trouble seeing the forest for the trees. Net sales increased 10% to $148 billion in Q2, a slowdown from the 13% growth in Q1. This should not be a surprise, given the economy-wide slowing of consumer spending. Amazon's operating income jumped 91%, from $7.7 billion in Q2 last year to $14.7 billion this year. While this looks terrific compared to 2023, it is 4% less sequentially. The slight slowdown in growth from Q1 to Q2 and new recession fears are worrying Wall Street. But Amazon's results were stellar where it matters most: AWS.
AWS is Amazon's cash cow. The cloud segment accounted for $66 billion in operating profits for 2021-2023 combined, a whopping 89% of the company's total operating profit. This is despite a rough 2023 when companies cut data budgets in anticipation of a recession that never came. But artificial intelligence (AI) is now a massive tailwind for cloud service providers. Generative AI programs require incredible data and processing power, and AWS will be a major beneficiary.
As shown below, AWS revenue growth accelerated in each of the last three quarters.
![https://img.particlenews.com/image.php?url=38iUzt_0uudpn9Y00](https://img.particlenews.com/image.php?type=thumbnail_580x000&url=38iUzt_0uudpn9Y00)
Data source: Amazon.
This trend is encouraging and bodes well for Amazon's results and stock over the long haul.
Is Amazon stock a buy now?
When valuing Amazon, I like to look at its price-to-sales (P/S) ratio and its price-to-cash from operations (CFO). Cash from operations, often called operating cash flow, is important because it tells us how much money a company's primary business generates.
As depicted below, Amazon is undervalued by 13% based on sales and 75% based on cash flow compared to its 10-year averages.
![https://img.particlenews.com/image.php?url=1kJTMT_0uudpn9Y00](https://img.particlenews.com/image.php?type=thumbnail_580x000&url=1kJTMT_0uudpn9Y00)
AMZN Price to CFO Per Share (TTM) data by YCharts
This is the lowest it has traded based on cash flow in over 10 years.
Valuing Amazon requires looking past a simple price-to-earnings (P/E) ratio, but the current P/E ratio of 38 is also the lowest in more than 10 years.
Amazon's overall sales growth could continue hovering near 10%. Management guided for 8% to 11% growth next quarter. However, AWS is the profit center; it has AI tailwinds and accelerating growth. At times like these, I like to remember two things that Warren Buffett says: "Be greedy when others are fearful" and "the stock market is a device for transferring money from the impatient to the patient." This advice could work well for Amazon investors.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Bradley Guichard has positions in Amazon. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy .
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