Amazon Opens the Hood

Amazon is expected to report earnings of 3 cents a share on revenue of $2.25 billion for the third quarter, according to a consensus of analyst estimates at Thomson First Call. In July, Amazon said it expects between $2.17 billion and $2.33 billion in third-quarter revenue.

While Amazon continues to post impressive top-line growth numbers, investors are growing more concerned about the company's shrinking operating margins. Amazon posted operating margins of 7.1% in 2004, 6.5% in 2005 and only 2.2% in the second quarter of 2006.

"Every quarter the company rolls out new initiatives and delays the profits it has been promising," says Robert Plaza, senior analyst at Zacks Investment Research.

"Our open query: When can investors expect to see a return on all this spending?" asks Caris analyst Tim Boyd, in a recent research note.

Moreover, Plaza worries about Amazon's increasing tendency to increase revenue by offering discounts and incentives such as free shipping. The strategy may backfire, with customers growing used to free shipping and balking at paying for it in the future.

It's this backdrop that makes Amazon's decision to launch a new line of business so interesting. The move signals Amazon's intent to remain as willing as ever to forge into big new markets despite its third-quarter setbacks. Increasing operating margins and other mundane tasks may take a back seat in the near future.