Amazon soars as digital sales boost margins

Fri Apr 27, 2012 1:01pm EDT
 
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By Alistair Barr

(Reuters) - Amazon.com Inc's stellar quarterly results are helping convince skeptics on Wall Street that a bout of intense spending is beginning to pay off for an Internet retailer trying to transform itself into a technology company.

Shares in Amazon leapt 15 percent on Friday after it reported first-quarter earnings and margins well above investors' most bullish expectations, tacking on some $10 billion in market value and marking its biggest single-day gain since October of 2009.

CEO Jeff Bezos has tried to convince investors to stick with the company for the long term as it flirted with losses in recent quarters. He is trying to transform Amazon from an online version of a big-box retailer like Wal-Mart into a provider of technology services.

Some investors argue that its valuation of over 70 times forward earnings -- dwarfing companies like Apple Inc and Google Inc that produce record profits -- is justified because Amazon is on track for enormous margin expansion as it expands into more-profitable services from hosting websites in the cloud to providing an online marketplace connecting buyers and sellers.

"These services will become an increasingly important part of Amazon's overall business and will be a driving force of profitability going forward," Bernstein Research analyst Carlos Kirjner wrote.

Amazon is trying to be "not a bookseller or a retailer, but a company that uses technology and (now) its scale to transform whole value chains" from retail to publishing and video distribution.

Heavy spending has pressured profit margins in recent quarters, hitting the company's shares. But in the first quarter, gross margins rose by about 120 basis points to roughly 24 percent, Macquarie analyst Ben Schachter estimated.

Amazon shares rose to $225.75 on the Nasdaq.   Continued...

 
A box from Amazon.com is pictured on the porch of a house in Golden, Colorado July 23, 2008. REUTERS/Rick Wilking