Sliding profit margins drag Amazon shares

BANGALORE Fri Jan 28, 2011 12:12pm EST

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

A box from Amazon.com is pictured on the porch of a house in Golden, Colorado in this July 23, 2008 file photo.

Credit: Reuters/Rick Wilking

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BANGALORE (Reuters) - Sliding profit margins at Amazon.com prompted mixed reactions from analysts on Friday, a day after it posted quarterly results, though most of them stuck to their top ratings on the world's largest online retailer.

The results showed profit margins at the company were sliding, worrying investors and sending its shares down more than 9 percent in midday trade.

About 13 million shares changed hands by noon, which is nearly 3 times the stock's 10-day moving average volume.

At least four brokerages cut their price targets on the stock, while two others raised them.

"Owning the stock here requires trust and patience. We have seen Amazon go through investment cycles before and believe investment in growth is the right long-term strategy for the Internet," BofA Merrill Lynch said in a note.

Amazon said last year that it was spending on 13 new distribution centers, and on Thursday it said that more would follow.

The cost to bring those to full productivity would weigh on short-term margin, the company said.

"We expect the company to continue to invest in increasing capacity to match growth," analyst Imran Khan at JP Morgan said as he lowered his fiscal 2011 pro forma operating margin estimates to 5.6 percent from 6.2 percent.

The company posted a slight dip in operating profit for the holiday fourth quarter despite revenue rising 36 percent, signaling the high cost of staying competitive in the highly promotional retail environment.

Khan, however, expects margin pressures to ease in the second half of the year.

Analyst James Mitchell of Goldman Sachs recommended investors buy Amazon, as valuations are still attractive.

Marianne Wolk of Susquehanna Financial said, "Most investors have been willing to look through weaker-than-expected margins in 2H10 assuming leverage would resume in 2011."

Credit Suisse analyst Spencer Wang supported the company's investment on new distribution centers and acquisitions and raised his price target on the stock.

"This is the right decision for the long run, given Amazon's attractive prospects and its high return on invested capital, notwithstanding the near term impact on margins," Wang said.

"Ultimately, we believe value creation is driven by increasing profit dollars as opposed to profit margins."

Separately, founder and Chief Executive Jeff Bezos trimmed his stake in the company to under 20 percent last year, a regulatory filing showed on Friday.

The CEO's stake came down to 19.5 percent as of December 31, 2010, from 21.2 percent, it said.

(Reporting by Renju Jose and Nivedita Bhattacharjee, Editing by Ian Geoghegan and Gopakumar Warrier)

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