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Amazon: The Focus Is On Profit Margins

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Amazon reports earnings later today and judging by what this stock is doing today, indeed these past several months, it would seem shareholders are hoping for the very best. And betting big that Amazon will deliver.

This has been a busy quarter for Amazon, seizing on the tenuous relationship between NBCand Apple and its iTunes digital entertainment download service. When that relationship went sour, NBC turned to Amazon to start selling shows like Heroes and The Office. And then of course there's the company's own online music store, selling titles without DCM restrictions. Amazon also reaped the rewards from the Harry Potter book, taking in over 2.2 million pre-orders for the title.

But the real focus with Amazon, as it always is, is on profit margins. The Street anticipates 18 cents a share on $3.14 billion in revenue. That compares to Amazon's own guidance of $3 billion to $3.18 billion, so analysts are clearly trending toward the high end. Mark Mahaney at Citigroup tells me the company could exceed 21 cents with a fair amount of optimism swirling around the company. He's also looking for $3.2 billion in revenue; setting the company up for that classic "beat and raise" quarter.

That's because the company is enjoying an acceleration in revenue growth, thanks in small part to foreign exchange and a falling dollar, but mostly because of the strength of online commerce. Margin expansion is likely going to get its fair share of attention because of the

Sixty-percent of Amazon's revenue comes from media products: CDs, DVDs, books. The company has enjoyed a leadership position there, but the industry is changing. Consumers had enjoyed buying online, and then accepted delivery through the mail of the physical product.

But the warning from UPS this week also suggests a big change in the business: those sectors will still be hot, but they will be delivered digitally. Amazon is starting to move in that direction with its online music store, etc., but it's too soon to say whether the company's digital delivery system is good enough to compete with the likes of Apple and iTunes. Will it affect Amazon this quarter or next? Probably not. But it is certainly THE trend to watch at the company over the next two years or so.

Part of the Amazon story comes from the year-over-year comparisons. This time last year, the company was languishing in a trough. This year, the trough is gone, so there's YOY comparisons will look very good indeed. Still, not everyone is sold on Amazon's prospects: Stifel Nicolaus analyst Scott Devitt is on the low-end in EPS and revenue expectations and issued a "sell" on the shares, saying margin expansion and growth projections are "now overly optimistic."

There might be something to that: This was a $37 stock a year ago. It's knocking up against a 7-year high now. Amazon reports right at the close, and of course we'll have the numbers the minute they cross the wires.

Questions? Comments? TechCheck@cnbc.com

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