Amazon shares pop on higher revenue

Momentum is so strong that the company says it could pull in up to $11 billion in the current quarter.

By Kim Peterson Jul 26, 2011 5:36PM
Updated at 12:15 p.m. ET July 27

Like some of its best customers, Amazon (AMZN) is on a spending spree that just won't quit. And investors are fine with that.

The company continued to plow money into operations in the second quarter, dropping its operating margin to 2% from 4.1% a year earlier. Its profit fell to $191 million, or 41 cents a share -- still beating the 35 cents analysts expected -- from $207 million, or 45 cents a share, a year ago.

So why are shares rising? One word: revenue. Amazon said sales climbed 51% to $9.9 billion -- far exceeding the $9.4 billion analysts were hoping to see. Amazon shares closed Tuesday at $214.18 and then jumped more than 6% after the bell before falling back slightly.

In midday trading Wednesday, the stock was up 5% to $225.

The momentum on revenue is so strong that Amazon said it should pull in between $10.3 billion and $11.1 billion in the current quarter. Analysts on average were expecting $10.35 billion.

It's hard to pinpoint what's driving that growth, since Amazon has always been a little cagey with details about its best-selling product, the Kindle e-reader.  The company said its electronics and general merchandise sales soared 69% from a year earlier to $5.89 billion. It's cheapest Kindle -- one that displays advertisements -- sells for $114.

But sales are only part of the picture at Amazon, and these days investors are highly interested in the other parts, including the as-yet-unannounced tablet computer and the company's cloud computing business.

Amazon hasn't said anything publicly about the tablet, but enough details have leaked out that we can assume it will go on sale this year and will have fewer bells and whistles than Apple's (AAPL) leading iPad. It will almost certainly cost less than the iPad as well.

An Amazon tablet would be designed to handle the movies, music and video rentals that Amazon sells online. At least one analyst thinks that the tablet may be sold for no profit, or perhaps even at a loss, just to increase those content sales.

"We maintain that an Amazon tablet could be priced as low as $299 in order to crack into the market, similar to past pricing strategies," wrote BGC analyst Colin Gillis in a research note.

Amazon is also making big investments in its "in the cloud" computing, offering Amazon Cloud Drive with unlimited online space for the music it sells customers. Its cloud computing service for businesses is also picking up, with some analysts expecting it to become a $1 billion business by next year. UBS analysts think Amazon will nab $500 million in Web Services revenue this year.

Amazon shares have soared this year. At today's close, the stock was up 80% year to date. That stock jump alone is enough to comfort investors who have watched Amazon's spending rise. The company is on track to open nine new centers this year after opening 13 last year.

"At this point it's a question of how long the company is going to continue to invest at their current levels," one analyst, Dan Geiman at McAdams Wright Ragen, told the BBC. "Presuming these investments don't go on forever, earnings should grow going forward."

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