Amazon Soars As Digital Sales Boost Margins

(Reuters) - Shares of Amazon.com Inc rose 14 percent on Friday morning, after the world's largest Internet retailer reported a surprise increase in gross margins, prompting a slew of price target increases by analysts. Amazon shares rose $27.43 to $223.47 on Nasdaq, the morning after it posted better-than-expected quarterly results as heavy spending and new products like the Kindle Fire began to pay off with sales of more digital content on the tablet. "The biggest surprise in the quarter was Amazon's gross margin increase of 120 basis points year-over-year, the largest uptick in ten years," RBC Capital Markets analyst Ross Sandler said. Faster growth at Amazon Web Services and sales of its digital goods drove the improvement in margins, analysts said. Amazon's 34 percent revenue increase to $13.18 billion also impressed Wall Street which had expected revenue of $12.9 billion, according to Thomson Reuters I/B/E/S. During the first quarter, nine of the 10 top-selling products on Amazon.com were digital products, including Kindle e-books, movies, music and apps. "Bulls have been waiting a long time for this gross margin upside and it finally came in the first-quarter," Macquarie Equities Research analyst Ben Schachter said. The company's shares had been hit by the lack of the margin growth over the past few months. Schachter expects gross margins to continue to ramp up in the long term as the company benefits from the increasing use of the Internet. Analysts at Macquarie, RBC, Citigroup and at least nine other brokerages raised their price target on the stock. Nomura upgraded it to "buy" from "neutral". According to Thomson Reuters StarMine, 12 analysts rate the stock "strong buy," 11 a "buy," 15 a "hold" and one a "sell." Only one rates the stock "strong sell." Analysts have a mean price target of $218.69. (Reporting by Juhi Arora, Tenzin Pema and Mihir Dalal in Bangalore; Editing by Saumyadeb Chakrabarty, Dave Zimmerman; juhi.arora@thomsonreuters.com; within U.S. +1 646 223 8780; outside U.S. +91 80 4135 5800; Reuters Messaging:; juhi.arora.reuters.com@reuters.net)

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