Foolish Forecast: Into the Amazon Jungle

Tuesday night, we'll get to run through the jungle with Amazon.com (Nasdaq: AMZN  ) . The veteran e-tailer reports earnings that day, and we're here to stock your shelves with pertinent information for the event.

What analysts say:

• Buy, sell, or waffle? Twenty-eight analysts keep tabs on Amazon, and their recommendations on the stock look like a standard bell curve. Six want to buy, five are selling, and the other 17 think it best just to hold on to what you've got. More than 1,350 Motley Fool CAPS players have weighed in with their ratings to give Amazon an unwavering one-star rating.
• Revenues. Wall Street expects $2.81 billion on average, up from $2.14 billion last year. Management guidance sets a range between $2.7 billion and $2.85 billion.
• Earnings. The consensus forecast points to $0.15 per share, three times the year-ago figure. The company didn't offer earnings guidance.

What management says:
CEO Jeff Bezos' recent letter to shareholders explained Amazon's philosophy on entering new markets. The three criteria that must be met, he said, are solid returns on invested capital, an opportunity to scale up to a significant revenue contribution, and an underserved market.

Recent finds that met all of these yardsticks include the nascent Web services operations and an automated interface for small businesses that want to hook into Amazon's physical distribution network. It's the size of the opportunity that matters, not the size of the first baby steps.

"I remember how excited we were in 1996 as we crossed $10 million in book sales," said Bezos. "It wasn't hard to be excited -- we had grown to $10 million from zero. Today, when a new business inside Amazon grows to $10 million, the overall company is growing from $10 billion to $10.01 billion. It would be easy for the senior executives who run our established billion-dollar businesses to scoff. But they don't. They watch the growth rates of the emerging businesses and send emails of congratulations. That's pretty cool, and we're proud it's a part of our culture."

What management does:
Gross margins are stable enough, but rising selling, general, and administrative costs are cramping Amazon's style further down the income statement. And while sales are growing in a predictably pleasant manner, the net margin shrinkage has led to vanishing earnings.

Margins	12/05	3/06	6/06	9/06	12/06	3/07
Gross	24.0%	24.0%	23.6%	23.4%	22.9%	23.0%
Operating	6.4%	6.0%	5.3%	5.1%	4.6%	4.8%
Net	4.2%	3.7%	3.3%	3.0%	1.8%	2.2%

Y-O-Y Growth	12/05	3/06	6/06	9/06	12/06	3/07
Revenue	22.7%	21.6%	20.8%	20.5%	26.2%	29.1%
Earns. From Cont. Ops.	-43.4%	-37.2%	-40.1%	-39.2%	-42.9%	-24.7%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
We've all heard the rumor that Amazon might put in an offer to buy movies-by-mail specialist Netflix (Nasdaq: NFLX  ) , but the above criteria explain rather nicely why that isn't likely to happen.

Return on capital would be hurt by Netflix's physical presence in nearly every state, via its network of distribution centers. After a putative buyout, Amazon would have to start charging sales tax on customer orders from all those new markets. There's a reason why Amazon won't cozy up to the other e-commerce businesses in Silicon Valley, for example -- scaring off price-sensitive customers in the massive Californian market would be a bad idea.

There's no doubt that the video rental market is large enough to matter, which is why Amazon is already testing the waters with its all-digital Unbox service. Is the Netflix market underserved? Not as long as there's a Blockbuster (NYSE: BBI  ) around with that aggressive Total Access plan.

The deal has thusly failed Amazon's litmus test, meeting just one of the desired criteria. Both companies are clearly better off on their own for now.

Back to the earnings report. It's the calm before the final Harry Potter storm, which will surely make the next quarter one to remember -- thank you so much, Scholastic (Nasdaq: SCHL  ) -- but don't expect fireworks this time. If the analysts are right, earnings will triple over last year, which sounds nice but isn't too exciting when you start with a very small denominator.

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Fool contributor Anders Bylund is a Netflix shareholder but holds no other position in any of the companies discussed here. You can check out Anders' holdings if you like, and Foolish disclosure is a trouble-free philosophy. Hakuna matata!