Earnings Preview: Amazon's Jungle

Amazon AMZN looks to boast strong revenue growth in the second quarter – but a number of obstacles could hurt sales down the road. To start, Amazon is, without doubt, the premier online shopping site. eBay EBAY may have strength within the auction niche and upstarts like Quibids may someday make for challenges in some spaces. However, when consumers want to make an online purchase, they typically turn to Amazon first. Further, thanks to a few wise purchases in the past few years like Amazon's buyout of Zappo's in 2009, there really are no true competitors in the online retail space. That said, Amazon still faces a number of challenges as it attempts to expand into other fields, and make itself a true tech giant on par with Google GOOG and Apple AAPL. Amazon's earnings reflect that dichotomy. The Numbers Amazon's revenue is expected to grow in the second quarter by about 27 percent as measured year-over-year, but decline a modest 4.4 percent compared with the previous quarter. That's according to Amazon's own guidance; analysts are expecting better, so even in-line growth could be seen as a miss in some quarters. Amazon's earnings, however, may fall this quarter, with analysts expecting a drop from 7 cents per share in the first quarter to 1 cent EPS in the second. While investors never like to see profits falling, Amazon may be given a bit of a pass. As the top online retailer and with the industry growing exponentially, Amazon can afford to forego some profits today in order to secure its top spot tomorrow. Amazon has been spending a good bit of money setting itself up for future growth, so as long as the top line revenues are growing, investors should remain happy. When Amazon announces earnings on July 26, we may indeed see good proof of just that. If expectations are met, revenue will rise significantly, profits will dip, while margins increase again – above the 24 percent we saw in the first quarter. That's a solid indication that Amazon's money flow is quite healthy as it is spending money on a number of investments. Amazon's Future The most famous of those investments today is the Kindle Fire – Amazon's Android-based tablet. With a price point of $199, it has proven to be the only true challenger to Apple's iPad. However, that price point has been reached through subsidies from Amazon as each Kindle has been rumored to be sold at a loss. With a new lineup about to launch (rumored to be expanded to further form factors) Amazon is making big inroads on the tablet market, but it's costing them. Further obstacles are also on the way. The U.S. is moving closer to an established system for taxing online purchases, which will likely hurt sales. Europe's quagmire will likely hurt Amazon on that continent as well. In other words, despite strong growth, any earnings miss for Amazon could prove very costly. With a P/E in excess of 180, there is not a lot of room for error. Amazon traded around $218.30 Wednesday afternoon, up over 26 percent year-to-date.