Amazon's Tall Order for Earnings

Amazon goes through these financial fits and starts quarterly, so the decline investors have suffered these last few months should not come as any major surprise.

What they have to ask themselves instead is whether that slide is justified? Or whether it represents some kind of buying opportunity?

Shares are rallying slightly into today's earnings, but still well off the $84.50 they traded at last quarter. Analysts tonight are looking for 26 cents on $3.96 billion in revenue. The EPS range on the Street is 22 cents to 30 cents and Amazon offered a revenue forecast of between $3.88 billion and $4.07 billion. For the full year, the Street anticipates something close to $19.5 billion.

For his part, Mark Mahaney at Citigroup says anything above $3.98 billion for the quarter would be good; below $3.95 billion would be bad. As far as guidance is concerned, more than $4.23 billion in the company's third quarter would be good; less than $4.2 billion not so good; and for the full year, more than $19.7 billion good; below $19.5 billion bad.

There are several key metrics to follow with Amazon, above and beyond guidance and current numbers. Analysts will be following things like North American revenue growth, which should be somewhere between 29 percent and 31 percent sequential growth; North American gross margins, somewhere around 25.5 percent to 26.5 percent; the same categories for Amazon's international business, and unit growth.

By and large, analysts I'm talking to expect a fairly ho-hum report, especially following the lackluster news from eBay last week. That doesn't mean the quarter from Amazon won't be solid; it's just that analysts say much of the news has already been priced into shares. Still, the jury still seems to be out as to whether a slowing economy can actually help Amazon or hurt it. Have consumers stopped spending all together? Or are they turning to websites like Amazon, trying to shop for bargains?

Other items analysts have been tracking: Amazon said during the quarter that it would open more fulfillment centers, adding infrastructure and employees. One of the key issues facing the company has always been capital expenditures which can hit margins. So color on that front will be followed closely on the conference call later today.

One other thing to listen for, and it's a good point from Stifel Nicolaus' Scott Devitt, who wonders whether higher gasoline costs are cutting into Amazon's bottom line. That's because some shippers are tacking on fuel surcharges that could "constrain shipping expense leverage and bottom line upside. Others are suggesting that higher fuel costs could actually help Amazon as consumers choose to fire up their computers to shop, rather than getting behind the wheel and driving to a store. The question, of course, is whether one will outweigh the other.

Citigroup points to comScore data that shows a slowdown in Amazon traffic that might be troubling. With 173 million unique visitors in the second quarter, up 13 percent from the same period last year, that would seem to be good news, but it's down slightly from the 15 percent growth the company enjoyed the quarter before. Worse, June traffic grew only 7 percent compared to June of last year, and it comes against double-digit growth in ten of the last 12 months. Is there a slowdown afoot, or was June merely an anomaly?

Even at these levels, well below where Amazon was a few short weeks ago, this company still trades at a 33x next year's earnings. That's pricey, especially with razor thin margins and a concern about traffic slowing down. But if Amazon can beat, and even offer a slight upside to its guidance, investors could be rewarded significantly.

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