Amazon soars as digital sales boost margins

Reuters News
Posted: Apr 27, 2012 8:35 AM
Amazon soars as digital sales boost margins

(Reuters) - Shares of Inc rose 16 percent in premarket trading on Friday, after the world's largest Internet retailer reported a surprise increase in gross margins, prompting a slew of price target increases by analysts.

Amazon on Thursday posted better-than-expected quarterly results as heavy spending on infrastructure and new products like the Kindle Fire began to pay off through sales of more digital content on the tablet.

"The biggest surprise in the quarter was Amazon's gross margin increase of 120 basis points year-over-year, the largest uptick in ten years," RBC Capital Markets analyst Ross Sandler said.

Faster growth at Amazon Web Services and sales of its digital goods drove the improvement in margins, analysts said.

During the first quarter, nine of the 10 top-selling products on were digital products, including Kindle e-books, movies, music and apps.

"Bulls have been waiting a long time for this gross margin upside and it finally came in the first-quarter," Macquarie Equities Research analyst Ben Schachter said.

The company's shares had been hit by the lack of the margin growth over the past few months.

Schachter expects gross margins to continue to ramp up in the long term as the company benefits from the increasing use of the Internet.

Analysts at Macquarie, RBC, Citigroup and at least nine other brokerages raised their price target on the stock. Nomura upgraded it to "buy" from "neutral".

According to Thomson Reuters StarMine, 12 analysts rate the stock "strong buy," 11 a "buy," 15 a "hold" and one a "sell." Only one rates the stock "strong sell." Analysts have a mean price target of $218.69.

Amazon shares were up at $227.75 in premarket trade. They closed at $195.99 on Thursday on the Nasdaq.

(Reporting by Juhi Arora, Tenzin Pema and Mihir Dalal in Bangalore; Editing by Saumyadeb Chakrabarty)