Amazon delivers 250% profit surge
http://business.guardian.co.uk

John Sterlicchi in Florida
Wednesday July 25, 2007
Guardian Unlimited


Forecast-busting results from Amazon, the world's largest online retailer, saw its shares surge 21% in after-hours trading on Tuesday, as analysts applauded the figures.

The giant e-tailer reported 35% sales growth to $2.89bn (£1.4bn), beating estimates by $90m. Net profit was up 257% to $78m, or 19 cents a share, three cents better than expected. Comparable sales in the second quarter of 2006 were $2.14bn and comparable net profit was $22m.


Yesterday's near-$15 jump in the shares, to $84.09, builds on the 55% surge in the price seen since the group delivered strong first quarter earnings in April.

The group has now raised its full-year sales forecast to a range of $13.8bn to $14.3bn. Previously, it was forecasting a range of $13.4bn to $14.0bn. Wall Street, on average, was expecting revenue of $13.86bn, according to Reuters Estimates.


Second-quarter sales on Amazon's US and Canadian sites were $1.6bn, up 38% over 2006, while revenues from its UK, German, Japanese, French, and Chinese operations were up 31% to $1.28bn.


Analysts estimate that more than half those north American sales were contributed by third party vendors, who sell their wares through its sites, and of which Amazon says there are now 1.1 million worldwide. However, third-party sales figures in the UK and elsewhere internationally could be as low as 5%, according to Jeetil Patel, an analyst with Deutsche Bank Securities.


On a conference call to explain the results, Amazon CEO Jeff Bezos would not be drawn on how the company intended to drive up those international third party sales, other than to say it would improve product selection to attract new visitors, which in turn would attract more sellers.


Mr Bezos credited Amazon's US revenue growth to low prices and to the success of its Prime shipping service, where shoppers pay an annual membership fee to receive a year's worth of free shipping.


CFO Tom Szkutak added that the company had begun rolling out internationally, with Japan the first country to get Prime outside north America.


Operating profit margins, traditionally worrisome at Amazon, came in at 4% of revenue in the quarter, well above the 2.2% seen a year earlier, when spending on technology and content was significantly higher.


Mr Szkutak said on the conference call that the company's 2007 spending on technology and content would be "significantly less than it was in 2006".


Even before last night's spike in share price Amazon carried a lofty price to earnings ratio compared to its peers. As of Monday's close of $71.74, its shares were priced at 52 times 2008's estimated earnings, while eBay was at 21 times and Wal-Mart 14 times.


Wall Street has begun to reclassify Amazon as a technology company, like eBay, instead of a comparatively low-margin retail company like Wal-Mart, said industry analyst Scott Devitt.


"Amazon was viewed as this low margin retail business, but it's actually a company that will invest in its business and look out to the very long term at the expense of the short term," he told the New York Times. "Right now the company is reaping the reward of its investments over the last 12 or 18 months."