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Tickers in this Article: AMZN, BKS, BGP, NFLX, EBAY, SNE
Amazon.com (Nasdaq:AMZN) reported third-quarter revenue up by nearly 40% with net income that increased 16% over last year's quarter. Amazon continued to gain customer accounts, with strong business in North America and its third party sales. The market was unimpressed with the earnings and initially lowered the stock on concerns about Amazon's margins.

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Amazon's Quarter
AMZN's revenue increased to $7.56 billion from $5.45 billion in last year's quarter, and its net income rose to $231 million, 51 cents per diluted share, from $199 million, 45 cents per diluted share in Q3 last year. Operating income rose only 7%, as non-operating income boosted the bottom line. Amazon began selling its new lighter, smaller Kindle, with new features aimed at improving the reading experience, at a base price of $139. The company noted the new-generation Kindles are the best selling products on Amazon.com and Amazon.uk.

Amazon's North American sales were up 45% in the quarter compared to last year's quarter, while European sales rose 32%. Electronics and other general merchandise, the segment which includes Kindles, accounted for $3.97 billion in sales. The media segment, which of course includes books, accounted for $3.35 billion in sales. Gross margin was 23.5%, an increase of 10 basis points from a year ago, while operating margins at 3.5% were down 106 basis points year over year.

More On Margins
The dynamic wrestling for the Street's attention is how investors see the potentially lower margins, which come from Amazon investing in product expansion as well as fighting for market share, versus Amazon's continuing growth. When Amazon decided to directly battle Barnes & Noble (NYSE:BKS) and Borders Group (NYSE:BGP) on the e-reader front with lower ebook prices, margins were certain to take a hit. The Street might want to keep in mind that Amazon has nearly put Borders out of business, but that seems to be overlooked. The margin contraction also has to be weighed against the rising Kindle sales, the tremendous expansion of Amazon's worldwide ecommerce - not just limited to books - as well as Amazon's venture into subscription streaming video. This would mean Netflix (Nasdaq:NFLX) is next in Amazon's competitive sights.

Amazon competes with many retailers yet nobody in the ecommerce space is quite like Amazon. Thus competitors so far can deliver glancing blows at best against Amazon. The Street, in a kind of myopia which it often mistakes for wisdom, needs to see the bigger picture on this. Whom should Amazon fear? The two brick-and-mortar booksellers? Sony (NYSE:SNE) because it has an e-reader? eBay (Nasdaq:EBAY)? (Financial discipline is the key to successful growth in the retail industry. See The 4 R's Of Investing In Retail.)

Amazon's Outlook
The company projects between $12 billion and $13.3 billion in sales for the upcoming fourth quarter, the all-important Christmas commerce season. This would be growth in the 25-40% range. Operating income is projected between $360 million and $560 million, which the company says could either represent a decline or an increase. That's a safe prediction to cover any contingency, as the midpoint of this projection was where last year's Q4 ended up. Look for a robust Christmas season from Amazon.

Amazon Stock
Amazon is certainly not unassailable, but it is a behemoth dominating ecommerce and is only growing. Its execution and evolution continue to succeed. Even with its growth rate slower and its margins challenged, Amazon has terrific prospects for the near and long term. Yes, the stock price is rich right now, with its P/E of nearly 70, and even a forward multiple of 48, any potential investor will be paying dearly for a share in it. So it's prudent to wait for a better price. But Amazon looks to be a business that's going to reign for a while.

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