Thursday January 31, 2013

Amazon shares hit record

Internet retailer posts strong Q4 profit on by higher-margin businesses

SAN FRANCISCO: Inc shares hit a record on Tuesday after it reported better-than-expected quarterly profit, fuelled by the growth of higher-margin businesses during the fiercely competitive holiday quarter.

The world's largest Internet retailer said that its cloud computing services, video content sales and its aggressive expansion in e-books helped increase profitability.

In addition, a growing network of warehouses or fulfillment centres closer to customers held down shipping costs as it vied with Wal-Mart Stores Inc and other major retailers for consumer dollars over the holidays.

Chief executive Jeff Bezos highlighted the Kindle's e-book business, calling it a multi-billion dollar category that grew about 70% in 2012. Its traditional physical book business rose about 5% in the same period, he noted.

“We're now seeing the transition we've been expecting,” Bezos said in the company's results statement.

Profits have shrunk in recent years as the company invested for longer-term growth, building massive fulfillment centres, developing a Kindle Fire tablet hardware and digital content business in competition with Apple Inc, and expanding into Internet-based cloud services.

The fourth-quarter profit results suggested that Amazon might be able to generate attractive returns from such spending, analysts said.

“The fourth-quarter operating income was up more than expected,” said R.J. Hottovy, an equity analyst at Morningstar.

“This supports the bull case that Amazon can monetise its growth over the longer term.”

The Seattle-based company said operating income jumped 56% to US$405mil in the fourth quarter, compared with US$260mil in the fourth quarter of 2011.

Amazon's stock climbed 9% to US$284 in after-hours trading and touched US$288 earlier in the session. It hit a record of US$284.72 in regular trading on Friday.

The company also said fourth-quarter revenue rose 22% to US$21.27bil as it grabbed a big share of online spending during the holidays. But it was the profit that initially caught Wall Street's eye.

“It was a much better-than-expected gross margin, a strong forward indicator to drive margin expansion. What is really important is gross profit dollars and that line is stronger,” said Ken Sena at Evercore Partners.

The gross profit margins were 24% in the fourth quarter, compared with Wall Street expectations of about 22%.

“Incredibly strong margins,” said Jordan Rohan, an analyst at Stifel Nicolaus. Amazon generated the highest quarterly gross margin in its North America business in more than three years, he noted.

Amazon mainly operates as a retailer, buying physical products at wholesale prices, storing them and then selling at a slight markup to consumers online.

But the company has expanded into other businesses that are potentially more profitable, including cloud computing, digital content and acting as an online marketplace for other merchants.

These newer businesses are growing faster than the company's original retail operations, boosting profitability. Reuters

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