After rare profit, Amazon shares go on a tear

In a sign of investors' continued infatuation with (AMZN), the e-commerce company's market value briefly topped that of Walmart (WMT) -- the biggest retailer in the world -- on Friday after the Internet company's surprise profit announcement.

Amazon shares surged to an all-time high after yesterday reporting earnings of $92 million, or 19 cents per share, in its latest quarter. That confounded analysts, who were expecting a loss of 14 cents per share. By comparison, Walmart earned $4.1 billion in its last quarter.

Revenue at Amazon surged 20 percent to $23.18 billion, topping expectations of $22.4 billion, thanks to the growth of its profitable cloud-computing businesses, Amazon Web Services (AWS) and strong demand for Amazon Prime.

Wall Street has had an ambivalent relationship with Amazon for years. Amazon CEO Jeffrey Bezos has repeatedly sacrificed short-term profitability in favor of rapid growth, spending billions developing Amazon's cloud business and building a global network of warehouse fulfillment centers. The executive famously doesn't appear on the company's earnings calls with stock analysts and once told a conference that he spends a grand total of six hours every year on investor relations.

The company, which has posted net losses in three of the past four quarters, also is tight-lipped regarding its operations, such as how many customers have signed up for Amazon Prime, its $99-per year services that gives customers free two-day shipping and access to video content.

"No stocks trade on the most recent quarter," said Michael Pachter, an analyst with Wedbush Securities in an email to CBS MoneyWatch."They are all valued at what investors believe to be the discounted present value of FUTURE cash flows. Amazon generated $1 billion in cash flow in 2009 on $24 billion in revenue. They will exceed $100 billion in revenue this year, and will generate more than $25 billion in gross profit, so if they control their spending, it's easy to see how they could generate $5-10 billion of free cash flow annually in just a few years."

Pachter, who rates Amazon shares a "buy," raised his price target on the stock after the company's strong quarter to $700, from $482.18. Amazon shares were up $51.07, or 10.57 percent, to $533.19 in late afternoon trading.

Indeed, Wall Street analysts found much to like in Amazon's latest results. Its web services business reported operating income of $391 million, an increase of more than 400 percent on a year-over-year basis. Cloud sales surged more than 80 percent to $1.8 billion. The unit has a segment operating profit margin of 21.4 percent, well above the overall margin for its North American business, which is about 5.1 percent.

"While impossible to know for certain, we believe that Amazon is now starting to move away from the heavy build years for its e-commerce business just as its top line accelerates, yielding the beginnings of the much sought-after margin leverage," said Yourself Squali, an analyst with Cantor Fitzgerald, in a note to clients. "Sustained, we believe this trend could lead to (earnings per share) outperformance for several years to come."

Squali rates Amazon shares a "buy" and raised his price target to $670, from $460.

One engine of the company's rapid growth is Amazon Prime. Analysts estimate that about 40 million people have signed up for the service. Those customers are also highly profitable, spending roughly twice as much with Amazon compared as non-Prime users.

Investors were further heartened by Amazon's bullish guidance. Sales in the current quarter are expected to increase to between $23.3 billion and $25.5 billion. The company's results may vary between a loss of $480 million and a profit of $70 million on an operating basis. Even so, its an improvement over the $544 million lost it posted during the year earlier period. Analysts had forecast sales of $23 billion.

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    Jonathan Berr is an award-winning journalist and podcaster based in New Jersey whose main focus is on business and economic issues.