Amazon Must Blow the Doors Off

Tuesday's earnings will show if the stock can build on a huge run-up.
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Can

Amazon.com

(AMZN) - Get Report

continue to amaze?

When it comes to red hot tech stocks, forget about

Google

(GOOG) - Get Report

and

Apple

(APPL)

. Shares of Amazon are up about 130% this year, with the bulk of those gains following the company's first-quarter earnings report in April.

But given its steep valuation -- the stock trades at almost 60 times forward earnings -- its ability to again move ahead of the broader

Nasdaq

index during the past three months has been equally impressive.

But if Amazon is to continue to hold onto its gains, the company will have to report another blowout quarter after the closing bell Tuesday. And while the health of its retail business will drive financial results, investors also need to see solid signs of progress from the company's push into selling computing services to businesses.

For the third quarter, analysts surveyed by Thomson Financial expect the company to earn 18 cents a share on revenue of $3.14 billion.

Stifel Nicolaus analyst Scott Devitt expects the third quarter to be strong for Amazon. The release of the final

Harry Potter

volume, the company's premium Prime service and a weakening dollar should have provided Amazon with a tailwind, Devitt wrote in a research note last week. Stifel Nicolaus makes a market in Amazon shares.

Despite the prospects of a strong quarter, Devitt downgraded Amazon to sell last week. While the company's one-year margin expansion should be impressive, it's likely to be less so two or three years out, Devitt wrote.

A slowdown in the U.S. economy also could hit the stock, which remains pricey.

Devitt, who was bullish ahead of Amazon's run-up, is still a fan of the stock, but he believes now is a terrible time to get in. "We remain an advocate for Amazon and its consumer value proposition, and have recommended the shares in the past in periods of uncertainty," Devitt wrote. "At current levels, we believe that the market is pricing in continued accelerating revenue growth and operating margin expansion just as the cycle, to us, seems to be peaking."

Shares of Amazon closed Monday at $91.29, up 1.7%.

But Amazon may give investors reasons beyond its retail business to get excited Tuesday. The company has long talked up the promise of its push into offering computing services like storage and on-demand processing to businesses. Indeed, the services have the potential to rival the size of Amazon's retail services over time, CEO Jeff Bezos has said.

There are now signs that these initiatives are starting to show more traction. At a recent conference, Amazon said that usage of its S3 storage platform has now grown to include 10 billion items, as compared to 800 million in July 2006. The company also has recently ramped up its EC2 computing service, and has introduced a new digital-payment service.

More bullish news about Amazon's progress into these high-margin businesses could give investors yet another reason to get behind the stock. And it's not like they're shy about getting behind the company as it is.