Amazon Stock Is Down 28%. Should You Buy the Dip Before May 1?

On April 2, President Trump announced plans to enact various tariffs on imported goods from practically all of America's trading partners. Amazon (NASDAQ: AMZN) sources products from all over the world for its e-commerce platform, so it's facing the prospect of significantly higher costs for the products sold on its site. Whether it chooses to absorb those costs or pass them on to its customers, the tariffs have real potential to put a serious dent in its margins.

Fortunately, Amazon is a diversified technology conglomerate. Not all its segments are directly affected by the trade tensions. Its Amazon Web Services (AWS) cloud platform primarily sells digital services, which aren't subject to traditional tariffs. That's great news because AWS accounts for most of the company's profits.

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Given the tariff turmoil, Amazon stock is trading down 28% from its recent all-time high. The company is scheduled to release its financial results for the first quarter of 2025 on May 1, which could be a positive catalyst. Should investors buy the dip ahead of the report?

Image source: Amazon.

All eyes on Amazon Web Services

AWS offers hundreds of cloud solutions to help businesses transition into the digital age, whether they need basic data storage, video streaming capabilities, or complex software development tools. It's the largest platform of its kind in the world, and it's using its immense scale to move into artificial intelligence (AI), which Amazon CEO Andy Jassy calls a once-in-a-lifetime business opportunity.

AWS is tackling the three core layers of AI -- data center infrastructure, large language models (LLMs), and software:

1. AWS has designed its own data center chips, called Trainium, to help reduce its customers' AI training costs by up to 40% from those charged by third-party suppliers (like Nvidia).
2. It has also developed its own family of LLMs called Nova, which can offer cost savings of 75% compared to models from other vendors on the AWS Bedrock platform.
3. To cover the third layer, AWS has built a powerful virtual assistant called "Q." It can write programming code to accelerate software projects, and it can help businesses analyze their internal data to uncover new opportunities to generate revenue.

AWS generated a record $107.5 billion in total revenue during 2024, which represented just 16.8% of Amazon's total revenue of $637.9 billion. However, AWS is highly profitable, so it accounted for more than half of the organization's entire operating income of $68.6 billion.

The platform's quarterly revenue growth accelerated to 19% in the early stages of last year and stayed there. On May 1, Wall Street will want to see whether AWS built on that momentum in the first quarter of 2025 and whether management says its growing portfolio of AI services was a major contributor.

Wall Street predicts significant earnings growth in Q1

E-commerce remains Amazon's single largest source of revenue, but it operates on razor-thin profit margins, so the company has focused on improving its efficiency over the last couple of years. It divided its U.S. logistics network into eight distinct regions in 2023, which allows the company to stock different products in different fulfillment centers depending on their popularity in specific geographic locations. This means orders travel shorter distances to reach customers, which lowers costs and improves delivery times.

Those adjustments contributed to significant earnings growth for Amazon last year. Unfortunately, tariffs threaten to undo its progress. As things stand today, tariffs will increase the cost of every product Amazon imports into the U.S. by at least 10%, and some products coming from China, specifically, are set to become a staggering 245% more expensive.

Wall Street will be eager to hear how Andy Jassy plans to navigate this issue, and the performance of Amazon stock in the short term could hinge on whether analysts are satisfied with his strategy.

Nevertheless, Wall Street's consensus estimate (as provided by Yahoo! Finance) suggests Amazon could deliver $1.36 in earnings per share (EPS) during Q1, which would be a solid 38.7% increase from the year-ago period. Simply put, AWS is likely to support the company's earnings amid the global trade tensions, as are segments like digital advertising and video streaming, which aren't directly subject to tariffs.

Amazon stock looks like a good value following the recent dip

The 28% dip in Amazon stock from its record high has created an opportunity for investors to buy it at a very attractive valuation. It now trades at a price-to-earnings (P/E) ratio of just 31.1, which is a steep discount to its five-year average of 83. I'm not suggesting it will get back there because 83 is very high, but Amazon has always traded at a big premium to the Nasdaq-100 index, which currently sits at a P/E ratio of 27.1.

If we look ahead to 2026, Wall Street expects Amazon to deliver $7.52 in EPS, which places the stock at a forward P/E ratio of just 22.9. Therefore, the stock would have to climb by 35.8% by the end of next year just to maintain its current P/E ratio of 31.1:

Data by YCharts.

Simply put, the biggest reason to take a long-term position in Amazon stock today is its current valuation, rather than what might come out of the company's Q1 report on May 1.

After all, Amazon has an incredible track record of success, which is why its stock has soared by a staggering 191,000% since it went public in 1997. One single quarter is unlikely to change its trajectory, so investors could earn a positive return over the long run whether they buy it ahead of next Thursday or wait until after the Q1 results are released.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Nvidia. The Motley Fool has a disclosure policy.