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Amazon Margins Trump Q4 EPS Miss, Q1 Sales Guidance

Amazon (AMZN) missed fourth-quarter estimates and guided sales forecasts lower, but shares surged in late trading Tuesday as investors focused on better profit margins.

The Seattle-based online seller of books and electronics earned 21 cents a share in the holiday quarter, down 45% from a year earlier, missing the analyst consensus by 7 cents. That excludes one-time costs but includes stock-based compensation.

Sales rose 22% to $21.27 billion. Analysts expected $22.26 billion. It was the sixth quarter in a row of slowing growth.

Marginal Improvement

But Amazon's operating margin, based on a trailing 12 months share of global net sales, rose to 1.1% in Q4 from 0.9% in Q3, though it was less than Q2's 1.2%. The moderate rise in profitability heartened investors.

Shares rose 9% late after falling nearly 6% in Tuesday's regular session and 3% Monday. The stock hit a record high Jan. 25.

Cantor Fitzgerald analyst Youssef Squali said in a post-earnings note that most impressive was Amazon's rise in gross margins to 24.1% in Q4 from 20.7% a year earlier, hinting at more third-party sales and improved operating leverage.

Amazon's cost of sales, including what it spends to support Kindle e-readers and free shipping services, surged 16.7% in Q4. Total operating expenses, including what it spent on fulfillment, technology, content and marketing, leapt 21.5%.

The e-commerce giant is betting that those investments will fuel growth — and long-term profits. So are investors.

"Investors still believe Amazon is going to win in the long run," said Jason Moser, an analyst for The Motley Fool financial website.

He and other analysts said Amazon missed sales expectations because of a lackluster holiday shopping season.

"Consumer confidence numbers were less than stellar and there were more options for shoppers out there from Target (TGT) and Best Buy (BBY)," Moser said.

Operating income grew 56% to $405 million.

Short-Term So-So

North American sales rose 23%. Foreign sales jumped 21%.

Amazon sees Q1 sales of $15 billion to $16.6 billion, below analyst views of $16.86 billion. That would be 14%-16% growth vs. Q1 2012. Operating income is expected to range from a loss of $285 million to a gain of $65 million. It earned $192 million a year earlier.

S&P Capital IQ equity analyst Michael Souers noted that holiday shoppers were a bit cowed by impending fiscal cliff negotiations in Washington and the end of the payroll tax cut during Q4. He says this caused retail sales to be somewhat weaker, undercutting Amazon's revenue.

"Amazon is still performing extremely well," Souers said. "They are doing all the right things to focus on the customer and long-term growth. They are sacrificing profit for revenue growth at this point. But further down the road that can increase their margins significantly from present levels.

JPMorgan analyst Doug Anmuth noted in a Monday report that recent results from eBay (EBAY) and Google (GOOG) suggest e-commerce trends remain healthy in the U.S., while Europe, particularly in Germany and the U.K., appear to be recovering. He says this will help drive continuing market share gains by Amazon and top-line growth.