LOS ANGELES (Reuters) - Two consecutive quarters of impressive results from Amazon.com Inc. have some on Wall Street saying the online retailer has finally proven profit margins can expand, but others still say its shares are too pricey and current margin gains may not last.
Amazon’s dizzying rise on Wednesday -- up 24 percent and a three-fold increase over the past year -- represents investor reaction to a glowing second quarter: Earnings tripled, revenue grew strongly and profit margins expanded.
Wall Street got its first glimpse of improved Amazon performance in the January-March quarter, a welcome sign after years of what many complained was the company’s focus on sales at the expense of profits, which stagnated as Amazon spent heavily on technology and content.
“Amazon goes two for two so far in 2007,” Jackson Securities analyst Brian Bolan wrote in a research note on Wednesday.
At least five brokerages raised their ratings on the Seattle-based company, while others raised their earnings estimates and price targets. Deutsche Bank’s Jeetil Patel raised his target on Amazon shares $100 from $80 -- a major jump, given that Amazon was trading at around $58 in January.
But a major bone of contention remains for the retail giant that sells everything from Harry Potter books to vacuum cleaners -- its valuation.
“While we expect the current resurgence to continue, though perhaps not as strongly, we believe that this is priced into the shares,” McAdams Wright Ragen analyst Dan Geiman wrote. He reiterated a “hold” rating on the shares, saying they are still fully valued.
That view was seconded by Stifel Nicolaus’ Scott Devitt, historically bullish on Amazon but rating the company “hold.”
Devitt said more than 10 years of investment by Amazon to enhance its customers’ experience was finally paying off in financial performance.
But, he added, “Given the move in the shares, we are reluctant to recommend purchase of Amazon shares.”
The shares were up $16.76 to $86.01 in afternoon trade on Nasdaq.
As of Tuesday’s market close, Amazon was trading at 50 times estimated 2008 earnings, well above brick-and-mortar rivals and Internet giants such as eBay Inc, which was trading at a multiple of 21.
HOW LONG DOES THE PARTY LAST?
Profit margins at Amazon have been a focus of Wall Street for years. Now, bulls see expanding gross and operating margins in the second quarter as a cause for celebration.
But several analysts cautioned that some of the upside on margins is due to a comparison against year-ago results, when a severed contract with Toys ‘R Us reduced profit.
Jeffrey Lindsay of Bernstein Research warned investors against expecting continued operating margin improvements, saying double-digit margin growth was “highly unlikely” without a major shift in strategy at the company, such as a greater focus on third-party sales, which have fatter margins.
He said assumptions about continued margin improvements “may be fueling irrational exuberance about the stock price.”
But certainly one investor is popping champagne corks: That would be Legg Mason’s Bill Miller, the fund manager who has been ridiculed for sticking with Amazon for so long. This year, the stock has been his biggest winner, representing nearly 5 percent of the Legg Mason Value Trust Fund’s roughly $20 billion.
“He has had a fabulous ride with Amazon,” Legg Mason Chief Executive Raymond Mason told Reuters on Tuesday.
Additional reporting by Svea Herbst-Bayliss in Boston
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