Amazon Sees a Big First Quarter, but Likely Will Post a Loss

With the company's first-ever quarterly profit in the rearview mirror,

Amazon.com

(AMZN) - Get Report

investors return to familiar territory when the online retailer reports first-quarter earnings on Tuesday.

The company will almost certainly swing back into the red for its seasonally slow first quarter, so analysts and investors will be scrutinizing the company's reams of data -- it is famous for pumping out long press releases filled with minutiae -- for signs that, eventually, it will be profitable on a consistent basis.

Seattle-based Amazon, which is scheduled to post results after the close of trading Tuesday, is expected to report a first-quarter loss, excluding certain items, of 9 cents a share, compared with a 21-cent loss in the year-ago period, according to Thomson Financial/First Call. Analysts expect revenue to come in at $805 million, up from $700 million a year ago.

Big Talk

Several bits of data released from various research outfits show that e-commerce was strong in the first quarter. For example, comScore estimates that total e-commerce sales rose 50% in the quarter, year over year. This led several analysts to raise their revenue targets for Amazon in recent weeks. However, the company instituted free shipping for orders over $99 during the quarter, and so most people kept their profit targets the same.

The free-shipping offer appears to have paid off big-time, and one jarring bit of data is that traffic actually improved compared with the fourth quarter, which for Amazon, like most retailers, is typically the busiest time of the year. According to Jupiter Media Metrix, traffic in the first quarter grew 57% over the year-ago period and 1% from the fourth quarter.

"Traffic was up sequentially, and that is mind-boggling," says Shawn Milne, who covers the company for SoundView Technology Group and recently raised his revenue estimate to $814 million from $800 million. "This is supposed to be a seasonally weak quarter."

Milne kept his hold rating on the stock, mainly because of valuation -- it's hard to justify a $4 billion market capitalization for a company that has yet to produce consistent profits -- and persistent worries about growth in the U.S. books business, which is Amazon's largest segment and is solidly profitable. (His firm doesn't have a banking relationship with Amazon.)

Drilling Down

The performance of the core books-music-video business is still a lightning rod for analysts and investors, and will be closely watched when the company reports first-quarter earnings. In the fourth quarter, Amazon reported that the segment grew 5% from a year ago. That only added to the excitement from the overall profit news, as sales in the segment had plunged 12% from a year ago in the third quarter.

But that enthusiasm was dampened when

TheStreet.com

reported that Amazon included fees and commissions from operating the

Borders.com

site in fourth-quarter results for U.S. books. Previously, Amazon had reported that revenue in a separate segment.

Making the situation potentially even more worrisome are data from comScore that show overall online book sales -- from all e-commerce outfits, not just Amazon -- declined 5% in the first quarter.

Finally, the health of Amazon's highly profitable services segment -- the partnerships the company has formed with retailers such as

Toys R Us

and

Target

-- will be put under the microscope. Earlier this year, worries over the fast-growing, high-margin business weighed on the stock. First,

TheStreet.com

reported that its largest partner, Toys R Us, had sought to renegotiate terms of the deal. Then, Lehman Brothers analyst Holly Becker weighed in with a report that

questioned the lack of visibility in the segment.

In the fourth quarter, Amazon turned its

first profit, which it had been promising for more than a year. At the same time, lingering concerns over the health of Amazon's balance sheet were allayed, as its cash position came in stronger than expected. As a result, ratings agency Moody's boosted Amazon's debt rating shortly after the earnings release.

The stock lately traded at $14.50, far from its once-nosebleed levels, but up about 43% since the profit report. But Wall Street has had three months to soak up the profit hoopla and now will be looking for signs that Amazon can reach its next goal: a return to the black in the fourth quarter and full-year profitability in 2003.

The company plans a conference call with the financial community at 5 p.m. EDT.