Having just posted its earnings report for the third quarter of 2014, Amazon.com (NASDAQ: AMZN) once again failed to meet expectations. Analysts are guiding the company’s stock down for the next quarter of the year. However, the scale by which they are guiding the stock down is truly incredible.

Net sales are estimated to fall between the range of $19.7 billion $21.5 billion. This is a between 15% and 26% of the third quarter of the 2013 fiscal year. It also takes into account roughly $410 million for compensation based on stocks, forgiving of intangible assets, and assumes that there will be no additional investments, acquisitions, legal settlements, or restructurings. This guidance also assumes that there will be no additional revisions to the stock based compensation forecasts.

The midpoint guidance for the company’s revenue growth is 20.5 percent year over year.

The Implication of Huge Operating Losses

The guide down implies that Amazon will suffer a massive EPS loss for the third quarter – about $1.00 per share. This is down from the present expectations for a loss of $0.07. Losses are now predicted to be more than ten times larger than they are now.

This possibility stems from the fact that the predicted $410 million operating loss is at the high end of the guidance range, and it is still necessary to account for the impact of additional P&L items, like those from equity losses at LivingSocial, financing costs, and earnings taxes from areas where it is impossible for Amazon to avoid taxes.

Additionally, the third quarter losses is so significantly larger than the amount expected, that it is very likely that the consensus for all of 2014 to be dragged down to at best, $0 from $1.05 currently.

Gross Margins

One of the key factors that are holding Amazon stock prices up is that the gross margins are supposedly improving. In reality, Amazon accounts for both AWS and third party commissions from marketplace sellers, at 100 percent gross margin. The company then accounts for the true variable costs of these activities lower in the P&L, in the AWS and third party commissions.

Thus, when AWS and third party commissions grow faster than Amazon itself, it creates the illusion that the company’s gross margin percentage is increasing – whether Amazon’s overall profitability is falling or rising. This is severely misleading to investors.

Keep Investors Waiting For Profits

Amazon continuously reminds its investors about its past – where it was able to outperform expectations and report much higher operating margins. Investors keep hoping for the day that Amazon rises to those heights once again and reclaims those margins.

However, the Amazon we know today has changed from the glorious Amazon that we remember from the past.

Amazon used to focus its efforts on media and less on electronics and gaming media. Now, Amazon has shifted its focus on EGM, rather than media.

This change in priorities is enough to explain Amazon’s downfall. In fact, this means that Amazon’s unprofitability is attributed to its inert structure.

Disappearance of Free Money

The next problem Amazon must deal with is the cutting off its supply of free money flowing into the company. Last quarter, the company’s free flow of cash fell $400 million, and is now at just under $1 billion. Within time, it will most likely drop to $0.

The culprit of this problem is AWS. According to Amazon, the company issued massive cuts in price, but the AWS still saw a huge rise in usage. Greater usage means greater capital expenditures. The increase in capital expenditures, coupled with decreased profitability, will be the ultimate reason for the cut off in Amazon’s capital flow.

Overall, it is clear that Amazon’s true value is nowhere near the price at which its stock is traded at. It is clear that the company’s profitability and structure is lacking.

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