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Amazon.com Inc.'s earnings reports leave investors in a quandary. Conditioned by watching Amazon's net income move down and as its shares move up, they know that profits as usually construed are irrelevant. Several alternative measures are popular, but should be handled with care when Amazon reports on Thursday.
The most obvious is revenue growth. In percentage terms, this has slowed for seven straight quarters. Wall Street thinks it perked up in the second quarter, to 23 per cent. If it does worse than that, the stock will surely get hit. But at a company that now has hit $55-billion (U.S.) in annual sales, per cent declines are inevitable. It makes more sense to focus on the absolute dollars of sales Amazon is adding. If this figure stays high, it provides reassurance that Amazon can still easily take share from bricks and mortar rivals. Dollar growth came in at $2.9-billion last quarter, the lowest in two years.
Another approach is to track variation in Amazon's operating margin, which, during the past year, have averaged just under 1 per cent. But, for example, Amazon could have almost doubled its operating margin last quarter by cutting its technology and distribution expenses by just 5 per cent each. The margin comes in thinner than usual, or not, at management's discretion. Changes in it should therefore be ignored.
Then there is gross profit margin, which measures the difference between what things cost Amazon and the price they sell for. Unlike operating profit, this does not (or should not) reflect the degree to which Amazon is investing in itself. So increases in gross margin should say something about future profits. It has been improving – helped in part by growth in sales by third parties hosted on Amazon's site. For Amazon's shares to stay at all-time highs, its gross margin must continue to widen.