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A Close Look at the Top Dog

Many are wondering when Amazon, the leader of the e-commerce pack, will produce those elusive profits.

Welcome to the jungle.

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will release its quarterly report on Wednesday, in the midst of the worst drubbing yet for the e-commerce sector. Investors lately have run screaming from these stocks on fears that some online retailers may never become profitable.

Amazon, as the alpha dog of the e-commerce pack, hasn't suffered as badly as smaller, one-product companies, many of which are 80% or 90% off their highs. But Amazon has definitely felt some pain of its own: Its shares have fallen 25% since it released its last quarterly report in February. At about 52, Amazon is trading at levels (adjusted for splits) not seen since last August.

And with that as a not-so-pleasant backdrop, analysts say they'll be paying attention to what Amazon says about its own path to profitability. Yeah, Amazon's stock rallied last quarter after the company posted stronger-than-expected revenue growth and said it would focus on profits, but it's been stingy with details on how exactly it will reach those profits.

"We want to understand the mechanics of profitability," says Sara Farley, an analyst with


who rates Amazon shares neutral. (Her firm hasn't done banking for Amazon.) Farley and other analysts want a road map and more information on the performance of different product lines. When will gross margins improve, and by how much? When will operating margins, which last year were -22%, move into the negative single digits? When will elusive profits materialize? Farley says she expects at least some guidance about the things that will push the company towards profits, and that increased openness may smooth out some of the volatility surrounding the stock.

Hitting all these marks will require better inventory management, greater efficiency in distribution and other nuts-and-bolts business issues with which all retailers -- not just e-tailers -- struggle. Basically, the Street wants to see Amazon leverage the customers it has in order to amortize its fixed costs. (It's already capitalizing on its customer base by

selling other companies access to its customers by putting tabs on its site, as with its deals with



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Less important than all these sorts of indicators of profitability (or the progress in that direction) will be revenue numbers. The first quarter is typically the least-important of the year for retailers, falling as it does after the much more revenue-hefty holiday season. But despite that relative unimportance, there will be a psychological hurdle for investors to get over: For the first time, Amazon's revenue is expected to decline from the previous quarter. (Analysts estimate it will fall by about 20%, to about $540 million.) There's a chance for an upside surprise, thanks to strong January and February sales, says Randy Befumo, an analyst with

Legg Mason

, which owns Amazon shares, but revenue still is not likely to stack up to fourth-quarter sales.

One thing Amazon's numbers are not likely to do is spark a rally in other consumer e-commerce stocks. Particularly after the recent shakeout, Amazon now pretty much sits in a category of its own. "Clearly, it's positioned better than any other online retailer, and it's tough to make assumptions about the lesser players" from Amazon's results, says Darren Chervitz, senior analyst with the

Jacob Internet Fund

, which does not hold Amazon shares.

E-commerce companies are no longer indistinguishable; it is generally agreed that companies with strong names employing the broad approach (like Amazon) will do better than niche players like


, which went public in February and is down 70% from its IPO price, and

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, up almost 10% Monday on the heels of a strong third-quarter earnings report but still down more than 50% from its IPO in September.

That's not to say that no one has doubts about Amazon. The company still faces big execution challenges in extending its dominance in books to other categories. But for now, the markets seem to think that in the world of e-tailing, bigger means better. And that puts Amazon in a relatively good position, which as an e-tailer, is about all you can ask for right now.