July 24, 2015 / 12:18 PM / in 2 years

Cloud services seen growth driver for Amazon

(Reuters) - Amazon.com Inc’s shares surged more than 20 percent in early trading on Friday, adding more than $46 billion to the company’s market value, after strong growth in the e-commerce giant’s cloud business drove a surprise quarterly profit.

The Amazon.com, Inc. logo is seen on the side of a delivery truck in Brooklyn, New York October 23, 2014. REUTERS/Brendan McDermid

The company’s market capitalization soared to more than $270 billion, overtaking that of Wal-Mart Stores, the world’s biggest retailer.

Revenue from Amazon’s cloud operations - Amazon Web Services (AWS) - nearly doubled in the second quarter, indicating that the business was poised to drive sustainable earnings for the online retailer, Wall Street analysts said.

Operating margins at the unit jumped to 21.4 pct from 7.7 percent.

“Product sales are Amazon’s bread, but AWS is its butter,” Wedbush Securities analyst Michael Pachter said in a note, raising his price target on the stock by 21 percent to $700.

“They delivered a pretty large profit, we expected a loss ... they exercised discipline and did not invest in new consumer electronic product launches.”

The company drew investor ire last year for spending too much after its Fire Phone and Fire TV failed to excite consumers.

Morgan Stanley raised its price target to $740 - the highest on the stock - implying a 53 percent increase from Thursday’s close of $482.18. The stock touched a high of $580.57 on Friday.

At least 24 brokerages raised their target price. The median target price on the stock is $645.50.

Of the 43 analysts covering the stock, 34 have “buy” or higher ratings, according to Thomson Reuters data.

Investors have raised concerns that the company’s aggressive spending may not pay off. But strong growth in AWS and positive commentary on the Amazon Prime service allayed some worries.

Amazon Prime members, who pay $99 a year for speedier delivery and exclusive access to certain movies, music and Kindle books, tend to spend more than regular users of Amazon’s services.

“The scale of their distribution network is starting to generate better incremental margins,” Barclays analyst Paul Vogel said.

“That, coupled with the continued strong growth in both revenue and margins at AWS, moves us from cautious to optimistic on the next year of growth for Amazon.”

Amazon, which last reported a profit in the fourth quarter of 2014, considers AWS its main engine of growth, along with Amazon Prime and Marketplace, where the company acts as a middleman for third-party vendors.

Amazon broke out AWS revenue and income for the first time in the first quarter.

Additional reporting by Tenzin Pema and Lehar Maan in Bengaluru; Editing by Sayantani Ghosh and Saumyadeb Chakrabarty

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