AMAZON:FULL FUNDAMENTAL ANALYSIS|SHORT SETUP SCENARIO 🔔

Amazon's stock price fell almost 8% on July 30 after the company released its second-quarter earnings report. The company's revenue growth did not meet analysts' expectations, and the company reported a lower-than-expected earnings outlook for the third quarter.

Amazon's fall weighed on other e-commerce and cloud stocks, as the company is considered an indicator of both markets. Many Wall Street analysts have also quickly decreased their price targets on the company's stock, citing difficult upcoming market comparisons in the wake of the pandemic. Let's take a look at the major conversations surrounding Amazon, find out who has the upper hand, the bulls or the bears, and whether the company is still a worthy investment.

Amazon's revenues increased 27% year over year in the quarter to $113.1 billion, but they fell short of Wall Street's average forecast by nearly $2 billion. The company anticipates its revenue to rise only 10%-16% year over year in the next quarter, while analysts were expecting 24% growth.

Amazon attributes the slowdown to difficult comparisons with the pace of online shopping growth caused by the pandemic a year ago. During a conference call, Amazon Chief Financial Officer Brian Olsavsky said that since last May, revenue growth "jumped to 35% to 45% and stayed at that level until the first quarter of this year, when growth was 41%." But starting in the second quarter, Amazon "began to slow down during a period of strong sales last year, and the rate of revenue growth for the year has declined."

Olsavsky foresees the slowdown to continue as "vaccines are becoming more available in many countries and people are getting out of their homes." He also noted that Amazon's average spending per Prime member "is down from the spending seen during the peak of the pandemic."

Amazon's accelerated growth during the pandemic and its subsequent slowdown make it difficult to estimate the company's near-term growth. So instead of focusing on hard year-over-year comparisons over the next few quarters, Olsavsky advised investors to look at the two-year annualized growth rate.

Olsavsky noted that before the pandemic, Amazon's earnings were up 21% for two years. But after smoothing out the volatility associated with the pandemic, Olsavsky still expects Amazon's two-year annual growth rate to be 25%-30%, indicating that its core businesses are still strong.

Amazon's long-term growth seems stable, but the main drivers of growth are changing. In the e-commerce segment, third-party sellers accounted for 56% of total paid units in the second quarter -- up from 53% a year ago -- and they continue to bring significantly higher sales growth than primary sellers.

This change is troubling because Amazon has already faced quality control problems in its third-party marketplace and persistent complaints about counterfeit products from overseas sellers.

Amazon's second-quarter revenue growth would have been even slower without the help of Amazon Web Services (AWS), the world's largest cloud infrastructure platform, and its advertising business.

AWS revenues rose 37% year over year to $14.8 billion, which is 13% of Amazon's total revenues, and its operating income rose 25% to $4.2 billion, which is 54% of Amazon's total operating income. Revenue from the "other" segment - which mostly consists of advertising revenue - rose 87% year over year to $7.9 billion, or 7% of Amazon's total revenue.

If you exclude AWS and the "other" segment from both periods, Amazon's second-quarter revenue would have grown only 22% year over year. Going even further and excluding all third-party vendor services, the company's revenue would have grown only 17% year over year.

Andy Jassy became new CEO in early July, but he has yet to provide a clear plan for the company's growth. Jassy previously led AWS, so Amazon's main profit driver - which subsidizes the growth of its low-margin retail business - is clearly in good hands.

Amazon's retail business, however, still faces serious challenges. Supermarkets like Walmart and Target have gotten better at matching Amazon's pricing and delivery capabilities, reliance on third-party sellers remains a double-edged sword, and the company is under pressure to raise wages and improve warehouse conditions. Shopify remains a major threat as it effects independent sellers to set up their online stores, and niche marketplaces like Etsy are pulling away shoppers who want more unique gifts.

Amazon also needs to expand aggressively overseas to drive new growth and reduce its reliance on an oversaturated U.S. market - but it is struggling to draw customers away from entrenched regional leaders such as MercadoLibre in Latin America and Sea Limited's Shopee in Southeast Asia.

Jassy may have to address these problems over the next few quarters to assure investors that Amazon is not losing its edge in the burgeoning e-commerce market.