UPDATE 3-Amazon holiday profit beats, sees strong 1st qtr

* Q4 EPS 85 cents versus Street's 72 cents

* Q4 revenue up 42 percent, beats estimates

* Sees Q1 revenue $6.45 bln-$7 bln vs view of $6.36 bln

* Sees Q1 operating profit $275 mln-$365 mln

* Shares up 2 percent after-hours (Adds CFO comment, details on earnings, analyst quotes, byline)

By Alexandria Sage

SAN FRANCISCO, Jan 28 (Reuters) - Amazon.com Inc (AMZN.O) blew past Wall Street profit estimates in its closely watched holiday quarter and forecast revenue for early 2010 that topped Wall Street expectations.

The online retailer -- which sells everything from books to barbecues while offering a host of services to businesses and Web developers -- has been viewed as a winner of a fiercely competitive 2009 holiday season.

Amazon, whose shares rose 2 percent in after-hours trade, has gained ground as more consumers turn to the Web for bargains and has moved aggressively against retail juggernaut Wal-Mart Stores Inc (WMT.N) in a battle for low-priced books, toys and electronics.

Amazon's growth "is not only intact and confirmed by the earnings report, they continue to surprise with nice upside beyond any reasonable expectations," said Frederick Moran, analyst at Benchmark Co.

"So far I see no chinks in the armor of Amazon's earnings report," he said. "We'd be buyers of the stock."

Without giving specific numbers, the world's largest online retailer also cheered investors with what it called record sales of its Kindle electronic book reader.

Amazon said it is now selling six Kindle e-books for every 10 physical books on its site in cases where it has editions in both formats, excluding free downloads.

Fourth-quarter net profit jumped 71 percent to $384 million, or 85 cents per share, from $225 million, or 52 cents per share, a year earlier.

Analysts, on average, had been expecting 72 cents per share, according to Thomson Reuters I/B/E/S.

Revenue increased 42 percent to $9.52 billion -- above the $9.04 billion expected by Wall Street and the $9.13 billion that was at the high end of Amazon's own forecast.

AFTER-MARKET SHOCK

Investor response to Amazon's numbers was strongly negative at first, with its shares falling more than 7 percent and then swinging more than 3 percent higher in a short period of time.

"Their gross margin was lighter in the quarter than I was expecting but they offset that by just managing their operating expenses," said Hamed Khorsand, analyst with BWS Financial. "People saw the gross margin number and that's probably what caused the stock to react negatively initially."

Amazon's gross margin was about 20.8 percent in the quarter while Khorsand was looking for 21 percent.

Operating margin rose to 5 percent as a percentage of total sales from 4.1 percent a year earlier and 4.6 percent in the previous quarter, driven by the strong revenue growth.

"We were able to take that growth and leverage our cost structure," Amazon Chief Financial Officer Tom Szkutak told reporters during a media call.

Lower prices on products offered by the company in the competitive holiday sales environment eroded that margin to an extent during the quarter but that was offset by growth in Amazon's Web service business, savings passed on from vendors and inventory management, Szkutak said.

In Amazon's media segment, which includes books, revenue rose 29 percent in the fourth quarter. It climbed 60 percent in the electronics and general merchandise category. North American sales increased 36 percent, while international sales rose 49 percent, boosted by favorable currency translations.

Amazon sees operating profit for the first quarter of 2010 of $275 million to $365 million, on revenue of $6.45 billion to $7 billion, representing a 32 percent to 43 percent rise.

Analysts had been expecting revenue of $6.36 billion in the first quarter.

Shares rose in after-hours trading to $128.57. (Additional reporting by Martinne Geller, Lisa Baertlein and Caroline Valetkevitch; Editing by Michele Gershberg and Steve Orlofsky)