Amazon’s Earnings Will Show Thin Margins But Big Growth

Amazon (NASDAQ:AMZN) will report its earnings for Q2 2012 on July 26. It had record sales in 2011, and also reported around 34% revenue growth in the first quarter of 2012 . However, its operating margins were hammered by selling the Kindle Fire at near zero margins to boost e-commerce and digital content sales in the long term.

While the company’s profit margin is expected to stay relatively low in the near future as Amazon continues to focus on revenue growth rather than profits, it should eventually recover as it makes up for the lost profits through digital content sales driven by sales of the Kindle Fire. Amazon competes in the e-commerce and e-content space with companies such as eBay (NASDAQ:EBAY) and Apple (NASDAQ:AAPL).

See our full analysis for Amazon’s stock here

Media sales growth expected to continue

Amazon’s media sales, which comprises e-content, books, DVDs and music, grew 19% last quarter. Given Amazon’s heavy investments in the Kindle and its content ecosystem, we expect e-content sales to increase significantly, going forward, and drive revenue growth for Amazon. The rapidly growing smartphone and tablet user base (iOS and Android) should also help drive e-content sales, directly benefiting Amazon, which is one of the leaders in the space and that offers content for almost every major platform.

Amazon continues to add books, as well as audio and video streaming content to its Kindle store, Instant Video streaming, Appstore and other digital content offerings. We will look at how effectively it has been able to leverage the Kindle hardware to drive sales of its content as well as its planned strategy for the same.

Margins may stay low for the near future

Amazon has already taken a severe hit due to heavy Kindle sales. We expect the margins to have improved in the last quarter as e-content sales increased. Its recent acquisition of Kiva Systems, and its ongoing efforts to reduce operating expenses should also help it stem the decline in margins and perhaps even see an improvement.

Since Amazon currently has razor-thin margins, even a slight positive impact on its margins would significantly boost its value. However, in the coming quarters, the company’s margins may take a huge hit again as it prepares to launch the next version of the Kindle.

Electronics and general merchandise sales account for around 70% of Amazon’s value, while books, music and digital media sales account for 22%. Amazon Web Services and Kindle hardware sales account for less than 3% each.

We currently have a $220 Trefis price estimate for Amazon, which stands just below its market price.

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