NEW YORK (AP) — Shares of Amazon.com Inc. briefly hit their highest level ever on Wednesday after the world's biggest online retailer impressed investors with strengthening profit margins in its fourth-quarter earnings report.
THE SPARK: Amazon posted a 45 percent decline in its net income as its ongoing spending — on its distribution network, its Kindle business and other investments — outweighed higher revenue. The results fell below analysts' expectations on most counts, including revenue and Amazon's revenue guidance for a current quarter. But investors were more than forgiving. That's because Amazon's thin profit margins showed some improvement, signaling that its long-running investments may be starting to pay off.
Cantor Fitzgerald analyst Youssef Squali said Amazon's profit margin was much better than expected at 24.1 percent, compared with 20.7 percent a year earlier.
ANALYST COMMENT: Benchmark analyst Daniel Kurnos said revenue fell short of expectations in part due to soft sales of "physical media," which includes DVDs, paper books and video game discs, as well as a shift toward more third-party sales. But he added that margins improved in part because of the shift toward more third-party sales, as well as strong digital sales, including a 70 percent year-over-year increase in e-book sales.
"While (first-quarter) guidance was a bit disappointing, we think Amazon finally showed material evidence of the margin potential investors have been expecting," Kurnos wrote in a note to investors. He kept a "Buy" rating on Amazon's stock and raised his target price to $330 from $310.
BACKGROUND: Amazon's profit margins have been thin because of heavy investments and the discounts the company offers to shoppers on its online mall. It has been spending a lot of its income on enhancing its distribution network, its website and its Kindle business as part of a long-term growth plan. It opened 20 order fulfillment centers in 2012, bringing the total to 89 worldwide.
SHARE ACTION: Shares of the Seattle-based company rose $14.92, or 5.7 percent, to $275.27 in afternoon trading. Earlier, the stock hit an all-time high of $284.79, surpassing the previous record reached last week, by 7 cents.