3 Areas Amazon.com Investors Must Watch

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There's no question that Amazon.com is in the middle of a huge growth phase. But with investments in new businesses like online video and cloud services set to continue eating up company profits, earnings don't tell the whole story for the e-tailer. Here are three metrics that investors should be watching for clues into Amazon's success instead.

1. Operating margin
Amazon's operating profit has taken a dive, thanks to the company's jacked-up spending levels. As just one example, it needs to spend upwards of $1 billion a year for content rights in its competition against Netflix for leadership over the online streaming market. Heavy investments in that and other businesses sent Amazon's operating margin down to 1% last year, setting a decade low. By comparison, Wal-Mart books 6% of sales in profits. And even Costco, which charges a razor-thin mark up on products, has Amazon beat at a 3% profit margin.

Bulls will point out that the company's gross margin, meanwhile, has expanded. And that's certainly true, as the chart below shows.


Source: Amazon 10-K Fillings: rounded to nearest percent.

But that's no excuse to ignore Amazon's vast -- and growing -- cost structure. The company's spending for tech and content, fulfillment, and marketing all grew faster than revenue last year. Investors should watch for that trend to slow in the years ahead, or else the company risks a sustained period of booking operating losses. Expenses were 98.9% of sales last year, making that a real possibility.

2. Services growth
Amazon's sales from third-party vendors are a major source of revenue and profit growth. And because they carry such a high profit margin, those sales were a key reason for the company's surprise jump in gross profits over the last few quarters. Amazon counts 2 million active sellers who happily take advantage of its marketplace, which is about the same total as it reported the year before . If Amazon wants to keep its profitable seller sales hopping, it will need to aggressively grow that base of accounts.

3. Active customers
While Amazon doesn't share its Prime membership numbers with investors, a good proxy for that figure is the number of active customer accounts. There were 200 million of these shoppers at the end of 2012. The company's big investments in warehouses and fulfillment centers should translate into a continued march higher for this number. But it absolutely needs to keep growing quickly for Amazon's torrid sales growth to continue.

More on Amazon from The Motley Fool

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The article 3 Areas Amazon.com Investors Must Watch originally appeared on Fool.com.

Fool contributor Demitrios Kalogeropoulos owns shares of Netflix and Costco Wholesale. The Motley Fool recommends Amazon.com, Costco Wholesale, and Netflix. The Motley Fool owns shares of Amazon.com, Costco Wholesale, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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