Ordinarily, if a company announces its profit dropped by more than a third and predicts a small profit or a possible loss for the following quarter, investors don't reward it with a stock bump of more than 15 percent. Amazon is an exception.
The Internet retailing giant reported a first-quarter drop in net income of 35 percent on Thursday, the result of big-ticket investments in its Kindle line, and in shipping and fulfillment equipment. It fell to $130 million or 28 cents a share, from $201 million or 44 cents per share a year ago.
"2Q12 operating income guidance still implies a 22 percent decline on the high end as Amazon continues to invest aggressively," Raymond James analyst Aaron Kessler pointed out in a research note, although he characterized the long-term outlook at "positive."
On the positive side, Amazon reported a 34 percent jump in revenue over last year, on the high end of what it told analysts to expect last quarter, and offered a prediction of second quarter revenues ranging from $11.9 billion to $13.3 billion. Investors liked what they heard; as of Friday afternoon, Amazon's share price was up more than 16 percent, to nearly $228.
The company has been adding features and offerings to Amazon Web Services, its cloud-based services platform. This month, it also began offering its Instant Video service via Sony's PlayStation 3 gaming console. It is rolling out the Kindle Touch to more countries and investing in the Kindle Fire as sales of ebooks outstrip physical book sales.
"Given the company accounted for roughly a fifth of the print book market in years prior, the number of eBook units that the company has been selling has clearly become significant," Heather Bellini, an analyst at Goldman Sachs, wrote in a recent research note.
Earlier this week, Amazon unveiled an initiative to sell business and industrial equipment and supplies. Last month, the company announced plans to purchase Kiva Systems, a company that makes robots used in shipping and fulfillment functions.
None of this comes cheap. Kiva, for instance, will cost Amazon $775 million. But the company has a long track record of right-venture, right-time spending, said Gene Alvarez, vice president of research at Gartner Inc.
"During the dot-com collapse, when a lot of companies scaled down on e-commerce, they continued to invest," he said. When the economy recovered and more people began buying things online, Amazon was far ahead of its competitors. "Part of me is saying that mindset is still there and that's what they're doing," he said.
Even as Americans' media consumption shifts more from the physical to the digital, analysts think Amazon is well-positioned to handle the transition.
"It is important to point out that Amazon continues to gain share in the physical world, while their Kindle footprint puts them in pole position to capitalize on the transition to digital," Bellini wrote.
Alvarez said he expects competition from other tablets and e-readers, especially Apple's iPad, to intensify, which makes Amazon's investments in growing its Kindle offerings look smart. "This rivalry is going to continue to heat up. it's going to come down to the consumers choice and the customer experience," he said.