April 26, 2012 / 9:00 PM / 7 years ago

UPDATE 5-Amazon's streak of Fire ignites shares

* Kindle Fire spurs purchases of digital goods
    * Margins improve as newer businesses grow faster
    * Shares leap almost 15 pct
    * Stake of CEO Bezos worth nearly $2.5 bln more


    By Alistair Barr	
    April 26 (Reuters) - Amazon.com Inc's quarterly
results beat Wall Street's most bullish expectations as heavy
spending by the world's largest Internet retailer began to pay
off through sales of more digital products on its new Kindle
Fire tablet.	
    Amazon shares surged almost 15 percent, increasing the
company's market value by more than $10 billion and boosting the
stake of Chief Executive Jeff Bezos by almost $2.5 billion. 	
    Analysts cheered first-quarter earnings and revenue which
comfortably exceeded their forecasts.	
    "It's been a couple of years since Amazon beat expectations
on both the top and the bottom line," said Colin Sebastian, an
analyst at Robert W. Baird & Co. "That's reminiscent of the
Amazon from three or four years ago." 	
    Amazon is spending in three main areas: fulfillment centers
to support online retail; video content and other media
businesses; and infrastructure for its cloud computing service. 	
    Among its latest ventures is the Kindle Fire, the tablet
that competes with Apple Inc's iPad, that some analysts
say the company is selling at breakeven or a small loss.	
    The Fire is important because it helps Amazon handle the
shift from physical media products, like books, DVDs, video
games and CDs, to digital versions of such content. 	
    During the first quarter, nine out of 10 of the top selling
products on Amazon.com were digital products, including Kindle
e-books, movies, music and apps, the company noted. 	
    Amazon Chief Financial Officer Tom Szkutak told analysts on
a conference call that the company was pleased with growth in
sales of the digital content that Kindle e-readers and the Fire
tablet are designed to accelerate.    	
    "One of the concerns with the shift from physical to digital
has been whether Amazon will be able to compete," said Ben
Schachter, an analyst at Macquarie. "They've done well in     
e-books, but now it looks like they're also doing well in other
areas like video."	
    North America Media revenue, which includes books, DVDs and
music, came in at $2.2 billion in the first quarter, up 17
percent from a year earlier. During the fourth quarter of 2011,
this segment grew 8 percent.	
    Amazon's Szkutak said higher digital content purchases by
Kindle customers helped North America media sales growth     
re-accelerate in the first quarter.  	
    	
    MARGINS IMPROVE  	
    Amazon's heavy spending has pressured profit margins in
recent quarters, hitting the company's shares. But in the first
quarter, gross margins rose by about 120 basis points to roughly
24 percent, Macquarie's Schachter estimated. 	
    "The biggest concern has been margins. A lot of investors
have been looking for the company to demonstrate that it could
get leverage on all of these investments it's been making," said
Caris & Co analyst Scott Tilghman.	
    The situation for Amazon now resembled "what we saw back in
the 2004 to 2006 time frame when the company was making a lot of
investments and margins got squeezed. Then in the years
following, margins expanded and revenue accelerated. It looks
like the company is in that position right now."	
    Shares in the company leapt to $225 in extended trading,
further swelling the company's already lofty valuation of more
than 70 times earnings.	
 	
    	
    BY THE NUMBERS	
    In comparison, the 12-month forward price-earnings ratio for
the S&P 500 stands at about 12, while Apple is trading at 13
times forward earnings.	
    Amazon reported net income fell to $130 million or 28 cents
per diluted share in the first quarter, versus $201 million or
44 cents a year ago. But that was far above the average Wall
Street forecast for 7 cents a share.	
    First-quarter revenue of $13.18 billion, up 34 percent from
a year earlier, was ahead of Wall Street estimates for $12.9
billion. Operating income was $192 million, compared with $322
million a year earlier.	
    "This looks like a quarter that has something for everyone,
growth and margins to satisfy investors. This was a perfect
balance. It looks to me there was a follow-through for the
Kindle and Kindle Fire in the re-acceleration of growth in
media," said Stifel Nicolaus analyst Jordan Rohan.  	
    "We were expecting 15 cents EPS ... and we were probably the
high end of the Street of where the margins were," said Evercore
Partners analyst Ken Sena.	
    "You are starting from a very low point: modest improvement
on a percentage basis. It looks pretty good. I think the margins
have a long way to go, but I think at least to see them moving
in the right direction is an encouraging sign."
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