Amazon (AMZN) reported disappointing second-quarter earnings results after the closing bell Thursday. Net sales of $113.1 billion (+27% year-over-year) missed analysts' $115.421 billion estimate. However, it is worth noting that $113.1 billion is right in the middle of management's prior outlook, meaning Amazon's quarter was as expected from management's point of view, and it was the analysts who mis-judged the company. Operating income increased to $7.7 billion, slightly missing estimates of $7.8 billion, although earnings per share of $15.12 (+215% YoY) topped the $12.28 expectation.

In addition to the mixed quarterly result, Amazon offered a weaker-than-expected outlook for the third quarter. The guidance calls for net sales between $106 billion and $112 billion (+10% to +16% YoY), and at a midpoint of $109 billion is well below estimates of $119.314 billion. Management's forecast for a slowdown is partly due to the very tough comparison to the depth of the pandemic last year, when everyone was at home and only ordering online, and now vaccine availability has allowed people to spend more time outside their homes. Management's forecast anticipates a favorable impact of approximately 70 basis points from foreign exchange rates.

Operating income in the third quarter is expected to be between $2.5 billion and $6 billion, and the midpoint of $4.25 billion also fell short of estimates of $8.2 billion. This outlook assumes $1 billion of costs related to COVID-19.

Management is typically conservative with its guide -- and maybe that's exactly what they are doing since this is the first quarterly report with Andy Jassy running the company, but Amazon's outlook is a pretty big disappointment. We are big believers that the pandemic pulled forward e-commerce adoption, but what a revenue miss and a weaker-than-expected outlook also suggest is that demand was greatly pulled forward, too. It is worth noting that the results reported here are from Q2 FY2021, when Jeff Bezos was still the CEO of the company. Andy Jassy assumed the position only earlier this month.

As a result of the revenue and outlook miss, shares of Amazon were trading about 7% lower in after-hours trading to around $3,345.

"Over the past 18 months, our consumer business has been called on to deliver an unprecedented number of items, including PPE, food, and other products that helped communities around the world cope with the difficult circumstances of the pandemic. At the same time, AWS has helped so many businesses and governments maintain business continuity, and we've seen AWS growth reaccelerate as more companies bring forward plans to transform their businesses and move to the cloud." Amazon CEO Andy Jassy said in the press release here. 

Turning to the results, by geography, North American net sales were $67.550 billion (+21% YoY), missing expectations of $69.693 billion. Operating income was $3.147 billion (+47% YoY), a result that was in line with expectations of $3.107 billion.

International sales in the quarter were $30.721 billion (+26 YoY), a miss against estimates for $31.647 billion. Furthermore, operating income of $362 million was less than expectations of $673 million.

By segment, net sales at Online Stores, the heart of Amazon's e-commerce business, were $53.157 billion (+13% ex-FX) and estimates of $57.351 billion. Worldwide shipping costs rose 30% YoY to $17.747 billion. In explanation of the sluggish revenue growth, CFO Brian Olsavsky said on the call that "As the quarter progressed, people were at home less as restrictions and lockdowns eased in some of our largest geographies, including the U.S. and much of Europe. As a result, while Prime members continue to spend more with us, growth in Prime member spend moderated compared to spending seen during the peak of the pandemic."

At Physical Stores (mostly Whole Foods) revenue was $4.198 billion (+10% YoY) in the quarter and above estimates of $4.007 billion. There was no discussion about this segment on the earnings call.

At Amazon Web Services, revenue of $14.809 billion (+37% YoY) topped consensus estimates for $14.281 billion, as sales growth accelerated from the 32% growth rate in the first quarter.

"AWS customers recognize that the move to the cloud is very positive for their businesses in the medium and long term," Olsavsky said in on the call. "Disruptive economic events like COVID have caused many people to step back and think about how they want to change strategically, and many have come to the conclusion that they do not want to own and run their own data centers. They see that they can save money and gain agility and innovation by moving to AWS."

Some notable customer wins in the quarter included Swisscom (SCMWY), BMO Financial Group, Ferrari S.p.A, and The National Hockey League. AWS Operating Income came in at $4.193 billion (+25% YoY) and was in line with $4.18 billion. The operating margin was 28.3%, which is lower than the first quarter's 30.8% margin and 31.1% in the second quarter one year ago. However, margins are known to vary quarter to quarter and are dependent on efficiencies, price decreases, new contracts, and expansion opportunities.

In Subscription Services, which include annual and monthly fees associated with Prime, audiobook, e-book, digital video, digital music, and more, revenues of $7.917 billion (+28% ex-FX) was in line with $7.906 billion estimates. Amazon does not disclose its Prime member count or any engagement metrics, but on the call Olsavsky said they have added more than 50 million new members in the past 18 months. We didn't hear any talk on the call about Amazon's pending acquisition of MGM Studio, but management cited the success of Prime Video movies like "The Tomorrow War" and Tom Clancy's "Without Remorse" and looked forward to next year's streaming rights to NFL Thursday Night Football.

Third-Party Seller services includes commissions and any related fulfillment and shipping fees, and other third-party seller services. Sales were $25.085 billion (+34% YoY ex-FX) and were slightly ahead of estimates for $24.814 billion. What's impressive here is that 3P seller revenues continues to grow even faster than online stores. That's big for Amazon's profits, because this is a higher margin business.

Other sales, which mostly comes from the high-margin advertising, came in at $7.914 billion (+83% YoY ex-FX) and topped estimates of $6.961 billion. We wouldn't call this outcome too much of a surprise considering the strong quarterly reports Twitter (TWTR) , Snap (SNAP) , Alphabet (GOOGL) , and Facebook (FB) have reported in the past week. Olsavsky said on the call that advertising " is innovating at a fast clip, launching over 40 new features and self-service capabilities in the quarter, making it easier for sellers, companies and authors to grow their businesses by helping customers discover their brands and products."

Overall, this wasn't the quarter we were hoping to see from Amazon as the strength in high margin businesses like Advertising, Third-Party Seller services, and AWS was not enough to offset new concerns of slowing e-commerce growth, a trend that is expected to continue into the third quarter and for the next few quarters. This means near-term expectations will have to be reset even though the long-term story here (a play on secular growth drivers such as e-commerce, cloud computing, and digital content) does not change.

As for the stock, we anticipate forward earnings estimates and thus price targets from analysts will move lower today, and that means the pullback isn't worth picking up on right away. We would let this shake out for a few days before coming in to buy. It is worth noting that as of this pullback, Amazon is the gross underperformer in 2021 in the FAANG+M mega complex (Facebook, Apple, Amazon, Netflix, Google, Microsoft). Maybe this slowdown in sales has already been priced in by smart investors for the past year, and hopefully this would be a buy-the-dip event for market.