Good results

Amazon released its Q2 results on 29 July. As expected, these results contained some encouraging numbers. Operating income, net sales, and operating cash flow saw increases of 24%, 27%, and 16% respectively. So why did the Amazon shares tumble over 8% the same day? The reason for this, as my fellow Fool Charlie Keough pointed out, was the somewhat disappointing Q3 projections. Projected growth for Q3 was estimated to reach the $106bn-$112bn range, falling short of the original $119bn projections. This fall is likely due to the reopening of economies leading to less online shopping.

Although the share price dipped, it is important to note that these results still show growth. If Amazon continues this impressive growth moving forward, I expect the share price to rise accordingly.

Diversified business

Amazon boasts a heavily diversified portfolio of services and subsidiaries besides its traditional e-commerce business. Two notable mentions include Amazon Web Services (AWS) and Amazon Entertainment.

For example, Amazon Prime Video turned over a $108.5bn revenue in Q1 of 2021, reporting streaming hours had increased by 70% comparative 2020 Q1. This is a great example of how the firm benefited from the pandemic and why Amazon shares skyrocketed as a consequence. With the pandemic threat still lurking, it is businesses such as Prime Video that will continue to drive revenue higher for Amazon.

In addition to this, AWS has been gaining significant customer momentum and is currently the fastest-growing part of Amazon’s business. AWS has been selected as exclusive cloud software by a number of industry giants across multiple markets. These include Ferrari, BMO Financial Group, Swisscom, and the National Hockey League. This cross-industry presence is reflective of Amazon’s dominance in its field, and I don’t expect this to be challenged anytime soon.

Risks to Amazon shares

The one issue that Amazon could face moving forward is slowing growth. The rapid growth experienced in 2020 isn’t likely to be experienced again, and as increased competition arises, Amazon’s market share could dwindle. That being said, this is a longer-term factor but is still worth keeping in mind.

In addition to this, Amazon currently has a beta of 1.32. This means Amazon shares tend to move at a higher magnitude than the wider equity market. This exposes investors to much larger market risk.

I think that moving forward we will see equity markets push higher, and Amazon shares will directly benefit from this. Its broad business portfolio is great for increasing revenues but may face competition in the long term. Anyhow, I would add Amazon shares to my portfolio today.

The post Is now the right time to buy Amazon shares? appeared first on The Twelfth Magpie.

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Dylan Hood has no position in any shares mentioned above. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended the following options: long December 2021 $130 calls on Ferrari, long January 2022 $1,920 calls on Amazon, and short January 2022 $1,940 calls on Amazon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Why am I avoiding Amazon shares?

There were a number of positives to take away from Amazon’s latest trading update. Indeed, in comparison to last year, sales were up 27% to over $113bn. Net income also increased by over $2bn. But despite these strong results, the Amazon share price fell by around 8%. So, what are the reasons for this?

In the company’s third-quarter guidance, it expected that net sales would be between $106bn and $112bn. This represents far slower growth than it has previously achieved, and investor confidence was dampened as a result. I feel that the reopening of physical stores is also likely to cause a slowdown in this growth. This is a slightly worrying sign for any growth stock.

Accordingly, I believe that there is now little upside to the Amazon share price. In fact, the company has a high price-to-earnings ratio of over 50. This indicates that Amazon shares may be overvalued, especially if growth is starting to slow down. So, while many investors are using the company’s recent dip to buy shares, I’m staying away.

The e-commerce growth stock I’d buy instead

MercadoLibre (NASDAQ: MELI) is an e-commerce company that operates within Latin America. The company performed particularly strongly in 2020, with revenues of nearly $4bn. This is around 75% higher than 2019.

But even as physical stores open up, growth is showing no signs of slowing down. In fact, in yesterday’s second-quarter trading update, the company saw revenues of $1.7bn, up 102.6% year-on-year. The number of active customers also grew by nearly 50% to reach 76m. Unlike many other tech companies, MercadoLibre also posted a profit, and net income was $68.2m. These are all extremely promising signs for a growth stock and the MercadoLibre share price was able to rise over 10% on the day.

In comparison to Amazon, I also feel there is more room for future growth. For example, Latin America is still a fairly underpenetrated market, and e-commerce is growing at a rapid pace. As MercadoLibre is the market leader in the area, it seems a prime beneficiary. Furthermore, I am also impressed by the company’s expansion into fintech over the past few years, with Mercado Pago. In the recent trading update, fintech revenues were able to rise around 90% year-on-year to $588m. This gives the company another dimension, and I feel that it will be able to propel growth.

One risk with MercadoLibre is its current valuation, however. In fact, it currently trades with a price-to-earnings ratio of over 500, demonstrating that future growth is already priced in. If the company disappoints on this, the share price is set to fall rapidly.

But so far, the company is excelling, and I believe profitability should increase over the next few years. This is why I initially bought this e-commerce growth stock, and after these earnings, I’m tempted to add more to my portfolio.

The post I’m avoiding Amazon shares in favour of this e-commerce growth stock appeared first on The Twelfth Magpie.

More reading

• 3 stocks I’m looking to buy in July
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• If this Dow Jones stock were valued like SpaceX, here’s how much it would be worth…
• 3 exciting space stocks to consider buying that aren’t SpaceX

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Stuart Blair owns shares of MercadoLibre. The Motley Fool UK owns shares of and has recommended Amazon and MercadoLibre. The Motley Fool UK has recommended the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.