Tracking Amazon's Thin Margin

All the pieces are in place for a repeat of that pattern on Tuesday. "Focus once again will be on operating margins, which has been the stumbling block for shares over the past several quarters," says Robert Peck, an analyst at Bear Stearns, which has no underwriting relationship with Amazon.

"A sequential improvement in operating margins and any signs from management that they plan to improve this metric will be a positive for the stock," says Peck, adding that he expects "management will continue its relentless focus on initiatives that drive customer satisfaction."

Most other analysts share that view. "Expanding operating margins will remain challenging given gross margin pressure, higher technology and content costs, and the possibility of higher sales and marketing spending in an increasingly competitive e-commerce environment," writes Douglas Anmuth, an analyst at Lehman Brothers, which doesn't have an underwriting relationship with Amazon.

Anmuth expects Amazon's operating profit to be only 4.4% of revenue in the second quarter, down from 5.7% in the first quarter and 6.2% in the year-ago quarter. Peck is calling for an operating margin of 5%. If they're right, Amazon's margin-obsessed bears will be polishing their brickbats.

Peck also points out that Amazon is continuing to see stiff competition from the traditional retail giants whose brand names are luring more online shoppers to their sites. Although Amazon's online traffic grew a respectable 12% in the second quarter, Sears'(SHLD Quote) grew 55%, Staples'(SPLS Quote) grew 63% and Target's(TGT Quote) grew 80%, according to Bear Stearns, which relied on CommScore data.

Of course, traffic doesn't always convert to purchases, and the page views of all the traditional retailers are well under half of Amazon's. But if the gap in growth rates continues for a few more quarters, Amazon will lose its lead as the busiest shopping site on the Web.

Also significant is the growth in smaller e-commerce companies and shopping-comparison sites. Overstock.com(OSTK Quote) saw its traffic nearly double in the quarter, while Shopzilla enjoyed a 57% rise in page views and Froogle, Google's(GOOG Quote) comparison engine, saw a 255% surge.

One thing about Amazon's bottom line: As tech companies make the transition from leaning on pro forma earnings (which include stock options and other items) to favoring GAAP earnings, it's causing some confusion, especially among individual investors.

Some investors initially thought that Google had missed its second-quarter numbers. And analysts such as Dan Geiman at McAdams Wright Ragen believe it might happen again with Amazon.

"Because there is some degree of inconsistency among analysts and their use of earnings estimates for purposes of deriving a consensus estimate (i.e., GAAP vs. some form of pro forma earnings)," Geiman writes, "investors will be somewhat more focused on sales growth and, to a lesser degree, gross and operating margins for the quarter." Geiman's firm has no underwriting relationship with Amazon.