Markets & Finance

Behind Amazon.com's Surprising Surge


The online retailer's shares zoomed Wednesday after its earnings topped estimates. One big factor: a lower tax rate

After taking heat from analysts for his spending on various new services, Amazon.com's (AMZN) CEO Jeff Bezos might now be able to enjoy a laugh. The e-commerce giant's stock price surged 26% on Apr. 25 after news of its stronger earnings during recent months.

The Seattle company's net income increased to $111 million in the first quarter ended March 31, up 115% compared to the same period last year. Net sales increased 32% to $3.02 billion. Even excluding $84 million of favorable impact from year over year changes in foreign exchange rates throughout the quarter, sales gained by 29%. "We're pleased with our overall strong growth," Bezos said in a press release Apr. 24.

Despite his critics, Bezos has continued investing in various new businesses. The long awaited online video service "Amazon Unbox," which offers downloads of movies and television shows, launched on Sept. 7. Months later Amazon announced plans to make the shows available to download directly to a customer's TiVo box for playback on TV sets.

In another example of activity during the March quarter, a Toys store launched on the amazon.fr website, offering customers items from brands including Hasbro, Mattel and LEGO. Amazon Enterprise Solutions Europe and the U.K. retailer Marks & Spencer also launched a multi-channel e-commerce service, including the website marksandspencer.com, phone catalog and customer support software applications. No longer merely a bookseller, Amazon has persuaded more than 240,000 developers to use Amazon Web Services so far, 50% more than the same period last year.

Amazon's spending on such programs has drawn ire from investors during recent months. The amount the company profits on each sale has diminished; Amazon's gross margins showed their lowest growth in about five years during the December quarter. But now during the March quarter they improved to 23.8% of worldwide sales from 21.3% during the Dec. quarter, compared to 24.0% during the March quarter of 2006.

Amazon Chief Financial Officer Tom Szkutak had cautioned analysts against becoming too concerned with the declining margins during a conference call in February, explaining that Amazon was investing in the site and offering lower prices to attract more customers overall and break into new product categories. Now Amazon's earnings amounted to 26 per share, while analysts surveyed by Thomson Financial had been forecasting only 15 cents.

Investors bid up Amazon shares by 26% to $56.44 in afternoon trading on the Nasdaq. Volume of 86 million shares was more than 12 times the stock’s average daily trading volume.

To be sure, Uncle Sam also gave the company a breather. Amazon's tax rate during the first quarter amounted to 23%, compared to 47% during the same period last year. Standard & Poor's equity analyst Michael Souers said in a research note that he had been expecting Amazon to have a 35% tax rate throughout the year, but the company had said in its first quarter conference call that the rate would instead remain steady at around 23%. After taking this factor into account, Souers raised his estimates on Amazon's earnings per share in 2007 and 2008, bringing his 12-month target price up by $2 to $52 per share.

Before hearing the announcement about Amazon's tax rate, Souers had hiked his target price on the stock to $50 from $42. "We continue to believe that AMZN has the ability to develop significant operating leverage over the next several years as its rate of spending on technology and content slows as a percentage of sales," Souers said in a research note. (S&P, like BusinessWeek.com, is owned by The McGraw-Hill Companies.)

Amazon has been spending for years on new ways to keep people shopping on its site. In the last half of 2006, for example, the company expanded its Super Saver Shipping program, which offers free shipping in exchange for a longer wait on selected items. Amazon also shipped more goods for free through its Amazon Prime program, first introduced in February, 2005, which provides free two-day shipping and $3.99 overnight shipping in the U.S. to users who agree to pay a $79 annual fee (see BusinessWeek.com, 2/2/07, "Amazon: Giving Away the Store?").)

As such efforts begin to pay off, Amazon now promises its operating income will be between $65 million and $105 million, including things like stock-based compensation, on between $2.70 billion and $2.85 billion during the second quarter. Full year 2007 operating income will be $463 million to $593 million on sales that range from $13.40 billion to $14.00 billion. The company's board has also authorized Amazon to buy back up to $500 million of its common stock within the next 24 months.

Analysts had been forecasting 67 cents per share on $13.4 billion for full year 2007 yesterday, according to Thomson. But early on Apr. 25, they've already begun to ratchet up those numbers to a real-time consensus of 91 cents per share on $13.7 billion.


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