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Amazon Shares Rise on Operating Loss Below Estimates

Oct. 25 (Bloomberg) -- Wedge Partners Senior Research Analysts Brian Blair and Bloomberg's Jon Erlichman look at Amazon.com's earnings. They speak on Bloomberg Television's "Street Smart." (Source: Bloomberg)

Amazon.com Inc. (AMZN) rose the most in three months after posting a smaller operating loss than analysts had predicted, suggesting that the world’s largest online retailer is doing a better job managing rising costs.

The third-quarter operating loss was $28 million, Amazon said in a statement yesterday, less than the average analysts’ estimate for a $42.1 million loss. Sales rose 27 percent to $13.8 billion, less than the average analyst projection of $13.9 billion compiled by Bloomberg.

Watch: Books and Gucci Shoes -- Amazon Tries High-End Retail

Chief Executive Officer Jeff Bezos is opening 19 fulfillment centers worldwide to offer speedier delivery to customers during the year-end holiday shopping season, contributing to a 28 percent increase in operating expenses. The Seattle-based retailer is getting better at managing margins, and investors are betting that higher spending now will result in higher sales down the road, said Colin Sebastian, an analyst at Robert W. Baird & Co.

“They’ve exceeded their operating profit expectations now for the fourth consecutive quarter,” he said. “Investors buy Amazon for long term expected cash flow growth and revenue growth -- the short term for Amazon isn’t as important as long as they are continuing down the trajectory of strong growth on the top line.”

Photographer: Scott Eells/Bloomberg

The livingsocial.com website is displayed for a photograph in New York. Close

The livingsocial.com website is displayed for a photograph in New York.

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Photographer: Scott Eells/Bloomberg

The livingsocial.com website is displayed for a photograph in New York.

Amazon rose 6.9 percent to $238.24 at the close in New York, for the biggest one-day increase since July 27. The stock has gained 38 percent this year.

LivingSocial Loss

Amazon’s third-quarter loss was $274 million, or 60 cents a share, compared with net income of $63 million, or 14 cents, a year ago.

The loss includes a charge of $169 million, or 37 cents a share, related to its stake in daily-deal website LivingSocial, which lost value as consumers and retailers soured on Internet coupons. Amazon invested $175 million in the coupon service in 2010, which means it has since lost 95 percent of its value, data compiled by Bloomberg show.

“Daily deals has been struggling,” said Daniel Kurnos, an analyst at Benchmark Co. in Boca Raton, Florida. “LivingSocial is going to need to re-accelerate their marketing expenses to keep the status quo.”

Excluding the impact of LivingSocial, Amazon had a loss of 23 cents, exceeding the 8-cent loss predicted by analysts, according to data compiled by Bloomberg.

Broad Investment

Fourth-quarter operating income will range from a loss of $490 million to a profit of $310 million, compared with analysts’ projections for $354.1 million in profit. Sales will be $20.3 billion to $22.8 billion, while the average estimate is $22.8 billion.

Amazon.com parcels. Photographer; Kostas Tsironis/Bloomberg Close

Amazon.com parcels. Photographer; Kostas Tsironis/Bloomberg

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Amazon.com parcels. Photographer; Kostas Tsironis/Bloomberg

Amazon is investing across the company to support a larger volume of products sold on its site, Tom Szkutak, Amazon’s chief financial officer, said on a call. That includes technology, such as the new Kindle devices it rolled out last month, and content deals -- like the one with pay-television channel Epix in September -- for its streaming video service. Fulfillment and server maintenance for its Web services business are also factors, he said.

“Those fulfillment centers don’t have the productivity until sometime in the future,” he said. “Two of the primary drivers of both are capacity-related. We’re adding a lot of infrastructure-related costs -- our fast-growing web services business, also to support the growth of our retail business.”

‘Lowest Margin’

The company boosted spending on technology and content by 55 percent.

Amazon has reported an operating margin of less than 2 percent for the last five quarters, according to data compiled by Bloomberg. The company is valued at 254.5 times earnings, the highest of any in the Standard and Poor’s 500 Index, the data show.

“Amazon has the lowest operating margin and the highest valuation in our technology company coverage,” Colin Gillis, an analyst at BGC Partners LP in New York, said in a note to clients yesterday. “The company is not likely to achieve material leverage off its revenue growth as costs associated with investments into its digital platforms build.”

Amazon unveiled a line of bigger and faster Kindles that range in price from a $69 ad-supported reader to the $599 top- of-the-line Kindle Fire HD tablet. The new devices are competing in a tablet market expected to reach $63.2 billion this year, according to researcher NPD DisplaySearch.

The e-commerce company is facing escalating competition from competing devices. Google Inc. announced the Nexus 7 in June, Apple Inc. unveiled the iPad mini, a tablet with a 7.9- inch screen, this week, and Microsoft Corp. began selling its Surface tablet yesterday.

To contact the reporter on this story: Danielle Kucera in San Francisco at dkucera6@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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