Amazon.com (NASDAQ:AMZN) alleviated investors’ concerns regarding its business strategy after reporting outstanding financial results for the first quarter ended March 31, 2016.
The stock price of the e-commerce giant climbed more than 9% to $658.10 per share around 1:03 in the afternoon on Friday.
Amazon.com has a reputation of making big investments in new business areas at the expense of profits. Investors often criticize or express doubts on its strategy.
Amazon investment strategy is working
In a note to investors, analysts at JP Morgan commented that Amazon’s strong quarterly performance was driven by a combination of many factors from the AWS, AMZN Flywheel, Prime, growing distribution footprint, getting closer to customers, and others. They said, “It’s all working.
The “Amazon Flywheel” refers to the strategy of the company’s founder and CEO Jeff Bezos—offering the biggest selection of products at the lowest prices and providing the best experience for consumers to create a “Positive feedback loop.”
Analysts at Goldman Sachs shared a similar view that Amazon’s investment strategy drives growth.
According to them, “We believe these results are further evidence that Amazon’s investment in infrastructure, logistics, and Web services is accelerating market share gains, cash flow growth and continued high returns on invested capital.”
Amazon first-quarter financial results
Amazon posted earnings of $513 million or $1.07 per diluted share compared with a net loss of $57 million or $0.12 per diluted share in the same period last year.
The company’s revenue increased 28% to $29.13 billion from $22.7 billion in the year-ago quarter. The Amazon Web Services (AWS) business grew 64%.
Wall Street analysts expected the company to deliver earnings of $0.58 per share on $27.98 billion in revenue.
Looking forward, the e-commerce giant expected its revenue to be around $28 billion to $30.5 billion, an increase of between 21% and 32% for the second quarter.
“Amazon reported an impressive quarter as revenue and margins exceeded our and consensus estimates as well as surpassed the high-end of guidance,” wrote Stifel analysts in a note to investors.
The analysts also anticipated that the e-commerce giant will invest in AWS, logistics and strategic geographic regions that could work against its margin expansion going into the quarter.
According to the analysts, “While we believe there will be heightened investment in these areas (which we support) that may make the progression to higher margins long-term bumpy, we must respect where the business is now. Relative to previous investment cycles, Amazon has more levers to offset the hit to margin.”
At least 22 brokerage firms upgraded their price target for Amazon. JP Morgan is the most bullish with a target of $915 per share. The average target for the stock was $777.50 per share.
Over the past year, the e-commerce giant gained 53% in stock value. Its shares are trading at 98.7 times earnings, an indication that investors believe that the company has a great potential to grow more.
