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The Internet’s largest retailer, Amazon (NASDAQ:AMZN), is due to report its Q4 earnings on January 29. The company had finished the third quarter on a low note, posting its first quarterly loss in almost a decade. The loss came despite a 27% growth in revenues. The loss can be attributed to its investments in LivingSocial, the Kindle e-reader and tablet business, as well as in geographic locations such as China and content for its video streaming service.

For the current quarter, we expect Amazon to report a strong growth in sales on the back of a blockbuster holiday season. Amazon led the growth in traffic and sales on the online retail sites during the November-December period. We believe that the company’s strong performance is a prelude to its dominance of the U.S. online retail market in 2013. It is also expected to launch its own advertising service in 2013, rivaling the might of the likes of Google (NASDAQ:GOOG) and Facebook (NASDAQ:FB). This is expected to help improve its margins, which will be critical for the company to turn profitable once again. On the earnings call, we will be closely watching how Amazon plans its return to profitability. We will also look for any announcements regarding the performance of the Kindle device range, which was launched in early September, and is speculated to have won some market share from Apple’s iPad during the holiday season.

Amazon competes primarily with leading retailer Wal-Mart (NYSE:WMT), consumer electronics giant Best Buy (NYSE:BBY) and eBay‘s (NASDAQ:EBAY) Marketplaces in the electronics and general merchandise market, Apple (NASDAQ:AAPL) in the tablet device market and Netflix (NASDAQ:NFLX) and Barnes and Noble (NYSE:BKS) in the content market.

Watch For The Impact Of Sales Tax

There is a growing belief that Amazon’s role as a sales tax collector, a responsibility it was exempted from initially, has negatively impacted the sales growth during the holiday season. North America contributes to about 55% of Amazon’s total sales, and any impact could be significant on company-wide results.

The fourth quarter is expected to be particularly representative of the impact of the roll out of sales tax on Amazon. The full impact of such a roll out in California, the most populous state where the taxes were first introduced in mid-September, will become apparent in the Q4 results. California is expected to set the trend for a countrywide roll out.

The Threat From Price Matching And Best Buy’s Recovery

Best Buy reported better than expected results for the holiday season, which had resulted in its share prices soaring, and planted doubts on the veracity of Amazon’s sales growth being as strong as the company’s press release suggested.

The other threat arises from the price matching initiatives retailers such as Target, engaged in during the holiday sales to retain sales from footfalls. (See also Best Buy’s Showrooming Counterattack: We’ll Match Amazon Prices, Time, October 2012.) We would look for the impact, if any, of Best Buy’s resurgence and price matching initiatives on Amazon’s sales. Offline retailer Target now plans to match online prices all year round, and we would look for Amazon’s plan to mitigate the threat arising from such initiatives. (See Target to Match Rivals’ Online Prices Year-Round, BloombergBusinessweek, January 2013.)

Overhead Threatens Margins

Amazon is in the process of setting up several warehouses and infrastructure for charging sales taxes in various states. We would look for the impact of higher administration costs associated with these activities, and the hiring of temporary personnel. The scale of holiday sales is most likely to have helped Amazon make an efficient use of its infrastructure, which could result in the quarter being a profitable one.

Amazon is expected to enter the advertising market on a large scale in 2013, which should help it improve margins. It is better placed to track shopping habits of users than either Google or Facebook. The data from such tracking is invaluable to advertisers, who can then better target their customers. We have discussed how Amazon Can Improve Margins By Seizing Its Advertising Opportunity, and would look for hints or plans from the company on entering the domain.

We have a $218 estimate for Amazon, which is 20% below the current market price.

Disclosure: No positions.

See our full analysis for Amazon’s stock here

Source: Amazon Should Post Strong Results, But Sales Tax Impact In Question