Amazon's Uncertain Holiday Season

Everyone's favorite retailer, Amazon (AMZN), reports after the close. I wanted to take a look at investor expectations for the quarter and the all-important holiday season.

Back in July, Amazon investors were disappointed by third-quarter guidance. Management guided to revenue of $19.7 billion to $21.5 billion and an operating loss of between $810 million and $410 million. Investors were expecting a breakeven quarter. The guidance was so bad you have to go back to 2003 to find a comparable period that had worse profitability.

Management claimed that the company needed to ramp up its spending in order to capture all the opportunities ahead. International expansion, more fulfillment centers and faster delivery are just a few of the things that are consuming huge amounts of money.

Some investors were beginning to wonder if this spending will pay off in terms of revenue growth and operating margin. Is there a pot of gold at the end of the rainbow, or will Amazon end up like Costco (COST) ¿ only profitable because of membership fees?

Every analyst lowered their rating, and the stock sold off. To stay long Amazon, you need a really, really long investment horizon.

Analysts are expecting $20.8 billion in revenue, up 20%, and a loss of $0.03 per share. But to me, the real risk is the fourth quarter. After the second quarter, analysts cut third-quarter estimates, but they didn't really touch the fourth quarter. Right now, the consensus is looking for fourth-quarter revenue of $30.9 billion and earnings per share of $1.37, which is too high to me. I think Amazon will guide the fourth quarter down to $29 billion in revenue and $0.80 in earnings per share. I wouldn't be surprised if my estimates are too high.

First, Amazon faces currency headwinds. The euro, pound and yen have all depreciated against the dollar and are sure to affect the quarter. Second, severe price competition is holding down revenue growth of Amazon's cloud server business. Third, the consumer seems tapped out. Retail has been tough all year, and I expect retailers to aggressively fight it out in the coming holiday season.

Fourth, revenue growth is slowing sequentially. For example, in 2010, revenue grew 70% from the third quarter to the fourth quarter. Last year, revenue grew 50% from the second quarter to the third quarter. This year, revenue is likely to grow just 40% to 45% sequentially. If I'm right, operating income could be down as much as $500 million.

If I'm right and management guides down the fourth quarter, I think the stock will decline 20% before buyers step in.

At the time of publication, Laudani has no positions in any securities mentioned.