Amazon.com (AMZN 1.34%) is set to report earnings after the market closes on Tuesday. Here's what you need to watch for in the results.
Expectations
The first question that tends to dominate in the moments after earnings come out is whether the company met the Street's expectations. For Amazon, that means booking at least $0.28 per share in profits, on a monstrous $22.3 billion in revenue.
That sales figure would mark a 28% increase from the year-ago quarter. And for a $100 billion business, that level of growth is phenomenal. Still, Amazon is actually expected to pull significantly lower profits from all those extra sales.
Checking in on spending
That's because the e-tailer is in the middle of a spending spree that's seen ramped-up investments in everything from splashy tablet devices to more video content to a stronger Web services infrastructure.
But the one factor that I'll be watching is shipping costs. Those fulfillment expenses have been growing faster than revenue over the last few years, reaching into the billions.
|
Year |
Net Shipping Costs |
|---|---|
|
2009 |
$849 million |
|
2010 |
$1.4 billion |
|
2011 |
$2.4 billion |
Source: financial filings
Amazon's generous shipping policies are one reason that its prices are so competitive against brick-and-mortar retailers. But with companies like Target and Best Buy (BBY -0.09%) upping the ante with price-matching offers, the e-tailer might need to grant even more shipping waivers to keep its price leadership position. And that could send the company's costs ballooning higher still.
Just how taxing?
Another wild card in this quarter's results is taxes. Amazon just started collecting sales tax in three additional states, removing one source of its pricing advantage over local competitors. The early signs are that the tax changes might have hurt Amazon's sales there, driving traffic to competitors like Best Buy. It's likely that the tax changes won't make much of a difference in the quarter, but they may have pinched profit margins slightly.
Still, the Street isn't too concerned with Amazon's profits right now. Huge revenue growth has been enough to keep investors happy while the company disrupts the retail world and chases massive business potential in a range of new markets. But as good as that sounds, I still prefer to watch this show from the sidelines, at least until Amazon's cost growth slows down.
