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Amazon Willing to Sacrifice Margins to Expand: Baird Analyst

Tuesday, 25 Oct 2011 | 1:27 PM ET

Amazon is doing so well it can afford to sacrifice some margin growth as it expands into digital media, Robert W. Baird senior research analyst Colin Sebastian told CNBC Tuesday.

"They're willing to sacrifice their margins near term to build more scale across all of their business lines, including the third-party marketplace," said Sebastian, who has an "outperform" rating on the stock. "But long term, this is obviously a significant opportunity to focus on long-term free cash flow generation and that's what investors should focus on."

The Internet marketplace reports earnings after the market close Tuesday.

Kindle Lights The Amazon Fire
A preview of Amazon's earnings and the strategy behind the company's growth plans, with Colin Sebastian, Robert W. Baird & Co. senior research analyst.

Expansion into digital media could come at Netflix's expense. Netflix shares plunged more than 30 percent after giving disappointing fourth-quarter guidance. Sebastian does not see an Amazon-Netflix merger on the horizon.

"Amazon already has a signficant active customer base, 140 million customers," he said. "They have agreements with studios in terms of content and don't think they're really interested in the physical DVD delivery business in the U.S. I think pursuing their own organic growth strategy through the Kindle Fire, through their own website, is a more likely scenario."

Analyst Tony Wible of Janney Montgomery Scott speaks about Netflix's latest troubles here.

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CNBC Data Pages:

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Disclosures:

Sebastian does not own shares but his company does own shares and makes a market in Amazon securities.

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