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'Great' Not Enough for Amazon

Vishesh Kumar

Amazon.com(AMZN Quote) has had a huge run, but it may be time for investors to wonder how much is left.

And given the enormous short interest in the stock -- 15.2% of the float was short as of June 12, according to Yahoo! Finance -- the Web retail giant's second-quarter earnings results on Tuesday afternoon will be especially important.

For the quarter, analysts surveyed by Thomson Financial/First Call forecast earnings per share of 16 cents on revenue of $2.81 billion.

Amazon shares have gained 60% over the past three months, recently trading at $70.67. Investors piled into the stock following a blowout first quarter three months ago in which the company reported continued strong top-line growth as well as unexpectedly strong operating margins.

The company also said that it expects spending on technology and content, which eats into margins, to be slower this year when compared to 2006.

Subsequently, Wall Street analysts scrambled to keep their 12-month price target for the stock close to its actual, rapidly rising value over the quarter. But the company now commands a steep valuation of 54 times forward earnings. And even analysts who are bullish about the business are hesitant to back the stock at its current valuations.

"Great company, fully-valued," Stifel Nicolaus analyst Scott Devitt wrote in a research note maintaining his hold rating on Tuesday. "We would revisit our rating on Amazon shares if the business materially outperformed our expectations or if the shares returned to the low-to-mid $50s, all else being equal," Devitt wrote. Stifel Nicolaus is forecasting earnings per share of 15 cents on revenue of $2.76 billion -- slightly under the Street consensus. Stifel Nicolaus makes a market in Amazon shares.

Along with revenue growth, investors will again pay close attention to factors influencing operating margins. These include the number of high-margin third-party sellers the company can attract, the mix of goods sold and spending on technology and content.

And while Amazon isn't expected to profit directly off the sale of the popular new Harry Potter book, signs of spillover benefits like increased site traffic could be greeted with enthusiasm.

Investors will also watch for any hopeful word about the company's progress into new digital arenas. Initiatives like the Unbox video-streaming service and Amazon Web services help support the argument that the company isn't just a retail giant but a technological innovator as well.

While receiving poor reviews after its initial launch, Unbox showed signs of progress over the quarter. Amazon announced a partnership with TiVo(TIVO Quote) that would allow customers to buy or rent Unbox videos directly from their TiVo sets. "As a customer of TiVo and Amazon Unbox, we can say with validation that the new service offers an outstanding consumer experience and that we believe it is only content agreements away from being broadly adopted by TiVo users," Devitt wrote.

Uptake for Amazon's Web services, which rent computing power and storage space to businesses, is also expected to be strong. Amazon management has said that this division, in time, could rival the size of Amazon's core retail business, while conceding it will be a long time before the investment starts reaping benefits.