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Why You Should Buy the Dip in Amazon Shares with ETFs

After the closing bell on Thursday, online e-commerce behemoth Amazon AMZN disappointed investors with a wide Q2 earnings miss. This is because expenses increased faster than revenues and took a toll on the company’s profitability. As such, shares of AMZN tumbled as much as 4.3% in after-market hours.

However, the dip could be a good buying opportunity given that Amazon has solid growth prospects. Additionally, the company topped our revenue estimates and provides upbeat revenue guidance for the next quarter. Further, Amazon is all about growing and does not really focus on bottom line. As per TIAA Investments managing director and equity portfolio manager, “As long as Amazon continues to grow its top line and its cloud computing service - Amazon Web Services, people will continue to buy Amazon.”

Q2 Results in Detail

The company reported earnings per share of 40 cents, way below the Zacks Consensus Estimate of $1.40 and down 77% year over year. Revenues climbed 25% year over year to $37.95 billion and topped our estimate of $37.21 billion.

Higher-than-expected revenues were credited to the fast-growing cloud computing business. Notably, revenues from the cloud computing business — Amazon Web Services (AWS) — rose 42% year over year to $4.1 billion and is on track to fetch $16 billion this year.

For the ongoing third quarter, the company expects revenues to grow 20–28% to $39.25–$41.75 billion. The mid-point is above the Wall Street expectation of $39.98 billion and the Zacks Consensus Estimate of $40 billion. The revenue guidance excludes the impact of the proposed acquisition of Whole Foods Market WFM. Amazon made a push into grocery world by striking an all-cash $13.7 billion deal with the leading natural and organic foods supermarket Whole Foods in early June. The deal is expected to conclude in the second half of this year (read: Amazon's Foray Into Grocery to Hurt/Help These Stocks & ETFs).

Amazon also expects operating income in the range of a loss of $400 million to a gain of $300 million. This will potentially be the first quarterly loss in two years. The company has a high cost business model as it keenly invests in areas such as fulfillment, original content, and international expansion. As such, large spending is always a concern for the company but these investments are actually growth opportunities that could earn Amazon a large market share to grow bigger.

Further, Amazon has a top Growth Style Score of A and boasts a solid Industry Rank in the top 24%. Its earnings and revenue are expected to grow 31.49% and 22.29%, respectively, this year, much higher than the industry averages of 23.17% and 7.17%. This suggests that the online giant is poised for strong growth.

ETFs in Focus

As a result, investors having a strong stomach for extreme volatility could take advantage of beaten down prices with lower risk in a basket form. For them, we have highlighted six ETFs that have Amazon as a top holding with a double-digit exposure (see: all the Technology ETFs here):

VanEck Vectors Retail ETF RTH

This fund provides exposure to the 26 largest retail firms by tracking the MVIS US Listed Retail 25 Index. AMZN makes up for the largest share at 19.8%. The ETF has a certain tilt toward internet & direct marketing retail and specialty retail that account for one-fourth of the portfolio each. The product has amassed $79.4 million in its asset base and charges 35 bps in annual fees. Volume is light as it exchanges nearly 20,000 shares per day. RTH has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with a Medium risk outlook.

Consumer Discretionary Select Sector SPDR Fund XLY

This product offers exposure to the broad consumer discretionary space by tracking the Consumer Discretionary Select Sector Index. It is the largest and the most popular product in this space with AUM of nearly $12.8 billion and average daily volume of around 4.1 million shares. Holding 88 securities in its basket, Amazon accounts for 16% of assets. Media dominates about one-fourth of the portfolio while internet & direct marketing retail, specialty retail, and hotels restaurants and leisure round off the next three spots with a double-digit allocation each. The fund charges 0.14% in expense ratio and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook (read: 4 ETFs to Ride on 16-Year High Consumer Confidence).

iShares U.S. Consumer Services ETF IYC

This ETF provides targeted exposure to the domestic consumer services stocks by tracking the Dow Jones U.S. Consumer Services Index. It holds 183 stocks in its basket with Amazon taking 13.1% share. In terms of industrial exposure, retailing makes up the largest share with 38.4%, followed by media (23.4%), consumer services (16.3%), and foods & staples retailing (12.6%). The fund has amassed $742.4 million in its asset base while trades in a moderate volume of 66,000 shares a day on average. It charges 44 bps in annual fees from investors and has a Zacks ETF Rank of 3 with a Medium risk outlook.

Fidelity MSCI Consumer Discretionary Index ETF FDIS

This fund tracks the MSCI USA IMI Consumer Discretionary Index, holding 366 stocks in its basket with Amazon accounting for 13.1% share. Media makes up for the top sector with 23.8% share, followed by internet & direct marketing retail (20.3%), hotels restaurants & leisure (16%), and specialty retail (15.9%). The product has amassed $294.5 million in its asset base while trades in a moderate volume of around 67,000 shares a day on average. It charges 8 bps in annual fees from investors and has a Zacks ETF Rank of 3 with a Medium risk outlook (read: Quincy Jones ETF: Creative or Crazy?).

iShares Edge MSCI Multifactor Consumer Discretionary ETF CNDF

This ETF has attracted $2.8 million in its asset base since its debut a year ago and trades in a meager volume of under 1000 shares. It targets companies that have the potential to outperform the broad U.S. consumer discretionary sector and tracks the MSCI USA Consumer Discretionary Diversified Multiple-Factor Capped Index. Holding 45 stocks in its basket, Amazon accounts for 12.9% of the portfolio. The fund is skewed toward retailing at 43.5% while media, consumer durables and consumer services round off the next three spots with a double-digit exposure each. CNDF charges 35 bps in fees per year.

Vanguard Consumer Discretionary ETF VCR

This fund follows the MSCI U.S. Investable Market Consumer Discretionary 25/50 Index and holds 379 stocks in its basket. Amazon makes up for 12.2% share. Internet & direct marketing retail, cable & satellite, and restaurants are the top three sectors accounting for a double-digit exposure each. VCR charges investors 10 bps in annual fees while volume is moderate at nearly 76,000 shares a day. The product has managed about $2.2 billion in its asset base and has a Zacks ETF Rank of 3 with a Medium risk outlook.

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Amazon.com, Inc. (AMZN): Free Stock Analysis Report
 
VANECK-RETAIL (RTH): ETF Research Reports
 
SPDR-CONS DISCR (XLY): ETF Research Reports
 
VIPERS-CONS DIS (VCR): ETF Research Reports
 
ISHRS-EMS MCD (CNDF): ETF Research Reports
 
FID-CON DIS (FDIS): ETF Research Reports
 
ISHARS-US CN CY (IYC): ETF Research Reports
 
Whole Foods Market, Inc. (WFM): Free Stock Analysis Report
 
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