Amazon's Early Holiday Cheer

Booming sales of e-book readers and material to read on them brought early holiday cheer to online retailer (AMZN) in the third quarter. And judging from the company's better-than-expected forecast for the current quarter, robust sales will continue through yearend at Seattle-based Amazon.

On Oct. 22, Amazon said third-quarter net income surged 68%, to $199 million, while revenue jumped 28%, to $5.45 billion, compared with Wall Street's estimate of $5 billion. "This looks like holiday-season performance and they're doing it in the third quarter," says Jeff Lindsay, analyst with Sanford C. Bernstein. For the quarter that ends in December, Amazon forecast sales of $8.1 billion to $9.1 billion, compared with $8.19 billion expected by analysts surveyed by Bloomberg News.

The performance and forecast reflect growing demand for the Kindle electronic book reader, which now sells more units and contributes more revenue than any other product on the site, Amazon said. The company doesn't release individual sales numbers for the device, but Citigroup (C) analyst Mark Mahaney estimates that it will sell 1.5 million, worth $700 million. An international edition of the reader went on sale the same day Amazon announced its third-quarter results.

Investors Shrug Off Fears The day after the earnings announcement, Amazon shares surged 27% to a record, closing at 118.49. The increase suggests investors have little concern the company, now trading at 78 times earnings, is overvalued compared with eBay (EBAY), another e-commerce company, which is trading at almost 20 times earnings.

On Oct. 21, eBay gave investors a relatively gloomy outlook for the holidays when it forecast fourth-quarter earnings of 38¢ to 40¢ a share, compared with 40¢ expected by analysts. The company also forecast sales of $2.2 billion to $2.3 billion, while analysts had expected $2.26 billion.

Customers of Amazon are snapping up not only Kindles, but also digital books that can be stored and read on the devices. Sales at Amazon's media segment, which includes e-books, video games, and digital music, grew 17%, to $2.93 billion. That's a big turnaround from the second quarter, when the media division showed no growth. "The explanation is a very strong performance from Kindle books," says Sandeep Aggarwal, analyst with financial-services firm Collins Stewart (CLST.L).

Outpacing Other E-Tailers Whether Amazon can keep the Kindle magic remains a matter of debate. On Oct. 20, book retailer Barnes & Noble (BKS) released its own e-book reader, the Nook, which many analysts said is more feature-rich than the Kindle.

Still, Amazon's fortunes ride on far more than e-books. Even as it boosted book sales, Amazon also nabbed share of the larger e-commerce market. While the company has typically outperformed other e-tailers by 19% over the past two years, it outpaced the market in the third quarter by 26%, according to Piper Jaffray (PJC) analyst Gene Munster. He says the company is getting smarter at using online advertising to goose sales and knowing which products to promote, and when. "They're gaining share because of experience," he says.

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