Amazon Profit, Sales Rise But Margins Disappoint

Online retailer reported operating profit margins that concerned some analysts despite a sharp rise in quarterly earnings, and its shares fell 9% in after-hours trading.

Despite bullish investor sentiment on the world's largest Internet retailer, some on Wall Street have warned that recent gains in operating profit margin are not sustainable, and that
more periods of investment spending at Amazon are inevitable.

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"What doesn't seem to have flown through is the operating margin performance that a lot of the bullish analyst scenarios had been betting (on)," said Global Crown Capital analyst
Martin Pyykkonen. "What they are saying to me is that there is no 'off to the races' operating margin," Pyykkonen said.

Amazon, which delighted investors with impressive results in the first two quarters of the year, said third-quarter net income more than quadrupled to $80 million, or 19 cents per share, from $19 million, or 5 cents per share, a year earlier. Revenue rose 41 percent to $3.26 billion.

The results beat average Wall Street estimates of 18 cents per share in profit on $3.13 billion in revenue, according to Reuters Estimates.

Operating income rose to $123 million from $40 million, above its own forecast for a range of $75 million to $110 million.

For the fourth quarter, Amazon said it expects net sales of $5.1 billion to $5.45 billion, with operating income of $221 million to $291 million.

Analysts, on average, have been expecting fourth-quarter net sales of $5.14 billion, according to Reuters Estimates.

"Their implied fourth-quarter operating margin was below consensus," said Colin Sebastian, a research analyst with Lazard Capital Markets.

"Certainly, the stock is pricing in pretty close to perfection at $100 a share, in my opinion, so any issues with margins or growth are going to cause reason for pause," Sebastian said.

Seattle-based Amazon, the second-most-popular e-commerce site behind auctioneer eBay, has pared back the rate of its spending this year, which helped improve margins and boost earnings growth while pushing up its share price 136 percent since Jan. 3.

But many analysts deem Amazon fully-valued -- its price-earnings ratio is far higher than Internet companies and retail rivals. Amazon trades at 59 times projected forward-looking earnings, compared with eBay at 22 times, and Wal-Mart Stores Inc at 13 times estimated 2008 earnings.

Amazon shares dropped to $91.58 from a Nasdaq close of $100.82 -- its first close above the $100 mark since 2000.