A popular online retailer of everything from razor blades to high-end treadmills, Amazon.com created a buzz this autumn with the launch of its inexpensive rival to Apple’s iPad, the Kindle Fire. But as the StarMine research team at Thomson Reuters continues its quest to identify those companies it expects will be generate big positive earnings surprises or deliver outsize disappointments when they report their fourth-quarter earnings, we discovered that despite all the buzz surrounding the new product, there’s a strong likelihood that Amazon’s fourth-quarter results may fall well short of analysts’ expectations.

Amazon is the third stock that the StarMine research team has focused on in its year-end review of the biggest anticipated earnings shortfalls and positive surprises for the quarter. (Our most recent prediction focused on Delta Airlines; you can see this report for details.) Amazon’s stock has been a high-flyer for much of the last decade, soaring from $10 to $177 in that period – an astonishing gain of almost 1,800%. (Amazon investors didn’t experience much of a ‘lost decade’…) But the stock is retreating, down from its recent record high of $245 a share, and now our research shows that the company has a large negative Predicted Surprise of -21% for the quarter. This indicates there is a strong likelihood that the company’s earnings will fall short of analysts’ estimates when it reports those results on 27 January 2012.

Currently, the Thomson Reuters I/B/E/S consensus EPS estimate (represented by the gold line in the chart below) for the next quarter is 20 cents a share, while the SmartEstimate (represented by the blue line) falls below that, at 16 cents a share. That difference explains the -21% Predicted Surprise, and signals that there is a strong probability that either the company will report earnings that fall short of analysts’ estimates or that those estimates will fall in the coming weeks. In either case, it seems unlikely that the company will manage to report profits that are as high as 20 cents a share.

Analyst Dan Geiman of McAdams Wright Ragen has been awarded five stars by StarMine in recognition of his track record as an analyst who has been more accurate than most in his earnings and other forecasts, only 10% of analysts are given a 5-star rating. In a recent report about Amazon, he points to margin pressures and incremental marketing and sales costs related to their new Kindle Fire tablet as earnings headwinds. As a result, he argues, the company may earn only 16 cents a share in the fourth quarter. The chart below shows that AMZN’s operating margin (blue line) has slipped to only 2.5%, more than four percentage points below the industry median. Dan Geiman fears that the new Kindle Fire tablets and the new Kindle e-readers are low-margin offerings that likely will reduce Amazon’s already-sagging operating margins still further; without a rapid increase in sales of new content on the new devices, he adds, “investors will start to lose patience.”

Source: Thomson ONE / StarMine

Although online sales of all of Amazon’s products may be robust and its stock (while lagging below its recent highs) seems to have a considerable amount of earnings and revenue growth priced in, analysts like Geiman apparently are becoming less upbeat about AMZN’s new Kindle Fire. Expectations for AMZN earnings for the coming quarter may still be too high. During the company’s most recent conference call, Tom Szkutak, AMZN’s chief financial officer commented that he expects content and advertising sales to follow the sales of the new devices. For now, investors may be willing to give AMZN the benefit of the doubt on these low/no margin initiatives, but they’ll want to see some evidence that they will lead to higher-margin cloud content sales before too much time has elapsed.
 

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