On cloud nine: Web growth powers Amazon shares

[July 24, 2015]   By Eileen Soreng

(Reuters) - Amazon.com Inc's <AMZN.O> shares surged 18 percent in premarket trading on Friday, adding more than $44 billion to the company's market value, after strong growth in the company's cloud business drove a surprise quarterly profit.

The jump in shares - setting up the stock for its best trading day in five years - takes Amazon's market capitalization to about $270 billion, overtaking Wal-Mart Stores Inc.

Revenue from Amazon's cloud operations - Amazon Web Services (AWS) - nearly doubled in the second quarter, indicating that the business was poised to drive sustainable earnings for the online retailer, Wall Street analysts said.

Operating margins at the unit jumped to 21.4 pct from 7.7 percent.

"Product sales are Amazon's bread, but AWS is its butter," Wedbush Securities analyst Michael Pachter said in a note, raising his price target on the stock by 21 percent to $700.

Jefferies raised its price target to $730 - the highest on the stock - implying a 51 percent increase from Thursday's close of $482.18.

The stock was trading at $577 before the bell on Friday.

At least 14 brokerages raised their target price on the stock. The median target price on the stock is $640.

Of the 43 analysts covering the stock, 34 have "buy" or higher ratings, according to Thomson Reuters data.

Analysts expect Amazon to continue to invest heavily in new products and services and international markets, particularly India.

Investors have raised concerns that the company's aggressive spending may not pay off. But strong growth in AWS and positive commentary on Amazon Prime delivery service could assuage some fears.

"The scale of their distribution network is starting to generate better incremental margins," Barclays analyst Paul Vogel said.

"That, coupled with the continued strong growth in both revenue and margins at AWS, moves us from cautious to optimistic on the next year of growth for Amazon."

Amazon, which last reported a profit in the fourth quarter of 2014, considers AWS its main engine of growth, along with Amazon Prime and Marketplace, where the company acts as a middleman for third-party vendors.

Amazon broke out AWS revenue and income for the first time in the first quarter.

(Additional reporting by Tenzin Pema in Bengaluru; Editing by Sayantani Ghosh and Saumyadeb Chakrabarty)

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