Amazon's Story Lies in the Margins

It does not require a Jedi mind trick: If you want to understand Amazon AMZN, you have to simply focus on its margins.

That does not mean mentioning margins as an afterthought, trailing other issues such as revenue growth, the latest heralded products, or the larger state of the U.S. economy. It means putting Amazon's margins in the same little gold box its Web site showcases its specials in.

Through the years, Amazon has proved adept at driving up revenues and expectations. And Jeff Bezos, the company's creator and leader, can spend on technology and kindle excitement for a new product like few others. But in the end -- just as it is for every other company from Wal-Mart to Gap to Microsoft -- it's the margins, stupid.

So how did the business media do in serving the savvy investor this week, when Amazon reported its first-quarter results? It was a mixed bag. In a straightforward but necessary exercise, let us simply review an example of the good and the ugly. It'll help you understand anything you read, hear or watch about Amazon in the future.

Dan Gallagher of MarketWatch gets The Business Press Maven's coveted "Nod of Approval" this week for this headline and lead:

"Amazon shares drop on profit worries: Online retailer's sales beat expectations; margins still a concern;" "Amazon.com saw its shares slip more than 3% Thursday after the online retailer posted strong growth in sales for the first quarter but raised fresh worries about its profit margins."

This properly alerts investors to what they should look for and be concerned about: margins. The story continues with an explanation of Amazon's ongoing troubles with margins:

"Amazon said operating income grew 36% to hit $198 million. The company's closely watched operating margin figure was 4.8% for the quarter -- essentially flat with last year's first quarter as well as the margin figure for the fourth quarter. Margins at Amazon have long been a concern with many investors as the company has spent heavily in recent years to build up its technology platform and has made efforts to continuously lower prices and offer services such as free shipping."

You can contrast this -- quite unfavorably -- with an Associated Press story about Amazon's earnings. Let's start with the headline, which mentions the larger issues of the economy and the company's general outlook:

"Amazon 1Q profit rises; investors still worry about economy: Amazon.com 1st-quarter profit climbs 29 percent, but full-year outlook spooks investors"

We get more of the same in the lead:

"Eagle-eyed investors are looking past Amazon.com Inc.'s double-digit growth in first-quarter earnings to spot signs that the Web retailer is not immune from broader economic uncertainty.

Even as Amazon's chief financial officer repeatedly said he didn't see evidence of U.S. shoppers changing habits ahead of a possible recession, analysts Wednesday were crunching numbers to find that the retailer had effectively lowered its sales expectations for the year."

The first mention of margins came halfway through the article and only highlighted the fact that in absolute terms, U.S. margins were up.

Anyhow, again: It does not take a Jedi warrior to figure out which end is up at Amazon. And it all depends on the margins. If the business media is emphasizing that issue over all others -- putting it in a figurative gold box -- read on. If not, don't. And may the force be with you, not the farce.

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