Technology investors are probably sitting anxious right now as second-quarter earnings linger right around the corner.
On the one hand, the tech sector has faired quite well so far in 2024 as artificial intelligence (AI) continues to fuel enthusiasm. But on the other hand, it's reasonable to wonder if some of the future growth pertaining to AI is already baked into valuations.
One stock that I've been monitoring closely as of late is Amazon(NASDAQ: AMZN). While shares of Amazon are up 20% so far this year, the stock has traded down roughly 7% during the month of July.
With earnings set to publish on Aug. 1, is this an opportunity to buy the dip in Amazon?
Let's dig into what investors should be on the lookout for as Q2 earnings near and assess if now is a good time to scoop up some shares.
All eyes will be on the cloud
One of Amazon's most important businesses is its cloud-computing platform, AWS. AWS competes fiercely with Microsoft's Azure and Alphabet's Google Cloud Platform.
Over the last couple of years, cloud infrastructure has been introduced to its newest growth driver -- artificial intelligence (AI). Microsoft made a splashy $10 billion investment in OpenAI, the maker of ChatGPT, and swiftly integrated the technology across the Azure suite.
Unsurprisingly, Amazon followed suit and countered Microsoft with a move of its own. Specifically, the company invested $4 billion into an AI start-up called Anthropic.
While investments in generative AI are exciting to read about, investors should be looking at how these relationships are impacting the business.
The table below breaks down Amazon's quarterly revenue trends for AWS over the last year.
Category
Q1 2024
Q4 2023
Q3 2023
Q2 2023
Q1 2023
AWS Revenue
$25.0 billion
$24.2 billion
$23.1 billion
$22.1 billion
$21.4 billion
% Growth Year Over Year
17%
13%
12%
12%
16%
Data source: Investor relations.
After several consecutive quarters of either decelerating or flat growth, AWS finally returned to revenue acceleration during Q1.
Although this is encouraging, keep in mind that Wall Street is quite demanding. During the Q2 earnings call on Aug. 1, Amazon's management will almost certainly be peppered with questions around the prospects of AWS -- specifically, how Anthropic is influencing growth and if consistent revenue acceleration should be expected.
Image source: Getty Images.
Here are some important metrics to keep in mind
As a shareholder, I'm obviously curious to see how AWS is performing. However, as a long-term investor I am less interested in quarterly performances and more focused on Amazon's underlying capital resources.
The slide below illustrates Amazon's operating cash flow and free cash flow as of the trailing 12 months ended March 31.
Image source: Investor Relations.
Over the last year, the company's operating cash flow grew by 82%, while free cash flow has gone from billions in cash burn to compounding positive results. Personally, these are the figures I will be most focused on.
Amazon has made a number of pricey investments in generative AI, data centers, and the development of its own semiconductor chips.
While it's too early to demand significant growth from any of these projects, monitoring the company's capital-allocation efforts is still important because it helps validate whether or not management is making both strategic and prudent decisions.
Is Amazon stock a buy before Aug. 1?
As I alluded to above, shares of Amazon have traded downward during the month of July. Sometimes a stock can experience brief buying or selling activity around the time of an earnings call if information leaks or if there is a heightened level of skepticism around what's to come. I don't think this is the case regarding Amazon's current sell-off.
Stock sales by founders are routine. Bezos still owns a massive position in Amazon; his current sales aren't a reason to panic.
I think now is a good time to take advantage and buy some shares while they remain a little deflated. Amazon appears to be returning to growth in its core cloud business, and the company's cash-flow positions remain exceptionally strong.
But with that said, I wouldn't pour into the stock by any means. I think it's better to remain focused on the long term and use a dollar-cost averaging strategy over the course of many years.
Whether you decide to buy some shares before Aug. 1 doesn't really matter in the grand scheme of things. If you have long-term conviction in Amazon's business and the company consistently generates strong financial results, then scooping up shares on a routine basis over a long-term time horizon can be a lucrative strategy regardless of when you specifically buy the stock.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Adam Spatacco has positions in Alphabet, Amazon, and Microsoft. The Motley Fool has positions in and recommends Alphabet, Amazon, and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
