From a numbers-crunching standpoint, Thursday's reaction to

Amazon.com's

(AMZN) - Get Report

quarterly report is akin to the mental state of your poor Uncle Edward. In a word, it's a little nuts.

Investors who sent the stock up 21% to 84 3/16 Thursday weren't focusing on Amazon's wider-than-expected loss, reported Wednesday evening. Instead, the company hung its hats on stronger-than-expected revenue growth and a pledge from management to focus on profits.

But if you resist the

Fox Mulder

-like desire to believe, the harsh reality is that Amazon's numbers suggest reaching profitability won't be easy. The report underscored shortcomings in inventory management and profit margins that promise to cause further problems for the Seattle bookseller, whose stock mostly flatlined after a hot start in 1999 and significantly underperformed its highflying

Nasdaq

brethren as investors began to worry about the bottom line.

Living in the Past

Prudential Securities

analyst Mark Rowen put Amazon's numbers into perspective Thursday in his morning note. Pointing to the fact that Amazon actually paid more for goods and fulfillment than it charged its customers, he compared it with a retailer of the past.

"Over the years, any number of retailers have tried this strategy, only to find it is extremely difficult to increase revenues in order to cover costs," Rowen wrote. "Remember

Crazy Eddie

? ... We do not believe

Amazon deserves credit for giving merchandise away below cost in order to drive revenue growth."

Even Wall Street, in its infinite ability to forgive this company, has ultimately been unconvinced by its promises. After two big run-ups in 1999 and Thursday's rise, the stock is still trading, on a split-adjusted basis, at the same place it was last January. Not exactly a great return for a company with 168% revenue growth during that time, over a period in which the Nasdaq returned some 80%. Now, Amazon's fundamentals may give the Street reason to go south on it again.

A New Day Yesterday

For one, the company's gross-profit margins -- a factor that has increasingly caught the

imagination of Wall Street since the beginning of the year -- are experiencing a bout of shrinkage that would make

George Costanza

cringe. They plunged to 13% in the fourth quarter from 19.8% in the previous one, even as revenue soared. Those numbers put Amazon in the same league with struggling e-tailer

Cyberian Outpost.com

(COOL)

, which reported gross-profit margins of 11.7% for its most recent quarter. While Outpost's price-to-sales ratio comes in at a squat 1.5, Amazon's towers at 17.7.

So how did a company that took in 90% more revenue in the fourth quarter manage to bring home a third less in gross profits? For one, Amazon stumbled in a category that has challenged retailers for ages: inventory management.

The online retailer ended 1999 with $221 million in inventory -- or almost a third of its $676 million in fourth-quarter revenue -- and had to take a charge of $39 million to write that inventory down. In other words, nearly a fifth of the merchandise in its warehouses is worthless. Clearly, a

Wal-Mart

(WMT) - Get Report

, Amazon is not. As Rowen puts it, Amazon's inventory management was "horrendous."

The company disagrees. In its conference call with analysts Wednesday night, Amazon CFO Warren Jenson floated the idea of viewing the inventory charge as a "customer acquisition cost." With the charge, Warren said, Amazon's per-customer acquisition cost was $29. While he said that's "still better than any e-tailer we're aware of," both

eBay

(EBAY) - Get Report

and

priceline.com

(PCLN)

reported numbers in the low teens. Jenson added that without the inventory charge, gross margins would have been 18.8%.

This Is Not Love

Amazon also said that its profit margins should approach 20% in the first quarter of 2000. The raft of deals that Amazon has made with smaller e-tailers such as

drugstore.com

and

Living.com

-- it inked a deal with

Greg Manning Auctions

(GMAI)

Thursday morning -- will give Amazon a much-needed infusion of cash. (The company's cash levels dropped from $1.4 billion in March 1999 to $700 million in the latest quarter.)

But Sara Farley, an analyst with

PaineWebber

who has a neutral rating on the stock and whose firm has not done any underwriting for Amazon, cautions investors to consider the downside of those deals as well. After all, one money-losing dot-com investing in another doesn't exactly beat a path toward profitability.

"Investors should be looking at Amazon's share of losses in those partners," Farley says. "Because those equity investments are being made, in part, to generate revenues and to work toward funding Amazon's own operations."

Farley estimates that Amazon's share of its partners' losses was $40 million in the fourth quarter. If those losses had been considered in its earnings, the e-tailer would have lost 12 cents more per share, for a total of 67 cents, vs. the 48-cent loss analysts were expecting. For the whole year, it would have lost 24 cents more per share, or 20% more than the $1.19 loss it reported.

Alas, with Amazon finishing Thursday's regular session up 14 3/4, all this numbers stuff obviously doesn't matter. At least, that is, until investors once again decide it does.