Amazon Hits Its Prime

For a few quarters, Amazon.com (Nasdaq: AMZN  ) seemed to be making investors nervous. Its first quarter seems to have assuaged their fears, if only slightly. Although its first-quarter profit fell, Amazon's sales increase surpassed that of its holiday fourth quarter, and its latest earnings release contained several other interesting statements.

First off, Amazon's press release headline nearly floored me: "First Anniversary of Amazon Prime Brings Continued Strong Growth." I'm sure die-hard Amazon fans already know that the Amazon Prime subscription service grants customers free two-day shipping for a flat $79 per year.

I'm not surprised that Amazon's emphasizing the service -- a controversial move that has long caused investors to sweat over margins -- and letting us know that it's been successful in driving sales. However, I found it a bit ironic that when questioned in the Amazon conference call, Jeff Bezos wouldn't publicly discuss the service's sales figures. He merely said that Amazon is very happy with what it's seeing from the service; subscribers doubled from November to December, according to the press release.

Moving on, Amazon's first-quarter profit fell 35% year over year to $51 million, or $0.12 per share, including effects of changes to accounting for stock options expenses. In that same period, sales increased a robust 20% to $2.28 billion. Amazon also pointed out that its free cash flow is up 20% for the last 12 months. Amazon hit analysts' estimates, but one storm cloud remains on the horizon: the company's continued skirmish with Toys "R" Us. Although Amazon believes that it will persevere in that legal disagreement, an unfavorable court ruling could cost the company $50 million this year.

Although many investors seem concerned about some of Amazon's recent margin-busting expenses, not to mention its high rate of tech investments, the company's overall strategy hasn't changed much. Amazon has always spent freely to preserve its customers' loyalty, and it has historically done quite well with that gamble. The company must also remain nimble to stay ahead of ever-shifting Internet competition, not only from old rivals like eBay (Nasdaq: EBAY  ) and Google (Nasdaq: GOOG  ) , but also from upstart firms that allow Web surfers to barter used goods, and from Apple's (Nasdaq: AAPL  ) iTunes Music Store.

Amazon seems intent on growing its crowd of helpful, review-penning, product-recommending users -- it said in its conference call that active customer accounts are up 19% -- and hoping that those users will want to stay. The mammoth e-tailer's share price may have only inched higher today, but it's better than some of Amazon's recent darker days. Maybe investors are starting to regain their faith.

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Alyce Lomax does not own shares of any of the companies mentioned.


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