Will Amazon (AMZN) Disappoint this Earnings Season?

Amazon.com Inc. AMZN is set to report second-quarter 2014 results on Jul 24. Last quarter, it posted a 4.55% positive surprise. Let's see how things are shaping up for this announcement.

Growth Factors This Past Quarter

Amazon posted decent first quarter 2014 results with both the top and bottom lines surpassing the Zacks Consensus Estimate. However, the quarter was seasonally slower, with the gross margin benefiting from a lower mix of hardware sales.

Amazon remains extremely competitive and manages to gain because of the scale at which it operates. The online retailer's introduction of new products and services for fast-growing segments including cloud computing and mobile devices will boost its digital media sales and attract new users. Amazon's Kindle, Prime and AWS platforms will facilitate the process.

Just recently, Amazon introduced the long-awaited smartphone, Fire Phone. Although Amazon has been successfully entering different markets, it might have to struggle to establish itself in the smartphone market, which is currently dominated by Apple and Samsung.

Amazon remains one of the leading players in the fast-growing e-commerce market aided by its extensive selection, free shipping and excellent user experience. It is also beefing up its delivery system to provide better customer service.

For the second quarter, management expects revenues to come in at around $18.1-$19.8 billion (down 4.0% sequentially, or up 20.7% year over year at the mid-point), roughly in line with seasonality, but below street estimates. Operating loss (including $455 million for stock based compensation and amortization of intangible assets) is expected to be between $455 and $55 million.

Amazon hasn't had a very good track record of late, missing estimates as often as it beats them. The company missed estimates in two of the last four quarters, netting a negative average surprise of 58.9%. So its surprise history does not really provide an optimistic indication regarding its future trends.

Moreover, our proven model does not conclusively show that Amazon will beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. But in this case, the stock has an ESP of -92.31% and carries a Zacks Rank #5 (Strong Sell).

We caution against stocks with Zacks Ranks #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum. In this case, Amazon has witnessed 1 downward revision for the current quarter over the past two months and no upward revision.

Other Stocks to Consider

Here are some other companies, which you may want to consider as our model shows that they have the right combination of elements to post an earnings beat this quarter:

Charter Communications, Inc. CHTR, with Earnings ESP of +387.50% and a Zacks Rank #1 (Strong Buy)

First Solar, Inc. FSLR has an Earnings ESP of +6.06% and a Zacks Rank #1

Silicon Motion Technology Corp. SIMO, with Earnings ESP of +33.33% and a Zacks Rank #1