Amazon shares soar on back of better-than-expected profit

Amazon.com shares hit a record high yesterday after it reported better-than-expected quarterly profit.

The internet retail giant said its cloud computing services, video content sales and its aggressive expansion in e-books helped increase profitability.

It was a much better-than-expected gross margin.

In addition, a growing network of warehouses or fulfillment centers closer to customers held down shipping costs as it vied with WalMart Stores 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 per cent in 2012. Its traditional physical book business rose about five per cent 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 centers, developing a Kindle Fire tablet hardware and digital content business in competition with Apple, and expanding into cloud services.

The Q4 results suggest Amazon may 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 monetize its growth over the longer term."

The Seattle-based company said operating income jumped 56 per cent to $405 million in Q4, compared with $260 million in 2011.

Amazon's stock climbed 9 per cent to $284 in after-hours trading and touched $288 earlier in the session. It hit a record of $284.72 in regular trading on January 25.

Margin focus

The company also said fourth-quarter revenue rose 22 per cent to $21.27 billion 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 percent in the fourth quarter, compared with Wall Street expectations of about 22 percent.

"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 mark-up 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.

Cloud growth

Amazon's cloud computing business, Amazon Web Services, or AWS, is also thought to be higher margin than the company's original retail business.

Amazon also runs an online advertising business that is also considered a lot more profitable.

These businesses are in the company's North America Other category, which generated fourth-quarter revenue of $769 million, up 68 percent from a year earlier.

"AWS is growing very fast and that is certainly impacting our operating profit," said CFO Szkutak.