Amazon Gets Its Props

Updated from 1:27 p.m. EDT

Amazon.com(AMZN Quote) was basking in its newfound respect on Wall Street Wednesday after a surprisingly strong earnings report pushed the stock 12% higher and prompted praise from analysts over its operating margins.

Amazon was the latest Internet giant to throw investors a curve ball. After six months of growing consensus that e-commerce was wilting while Internet search was unstoppable, the second quarter saw an abrupt reversal in those trends. In addition to Amazon, eBay(EBAY Quote) surprised investors with a strong earnings report, while Yahoo!(YHOO Quote) and Google(GOOG Quote) had reports that, while showing healthy financials, failed to sate investor appetites for growth.

Amazon shares were trading up $4.62, or 12.3%, on Wednesday after it posted a 12 cents-a-share profit, 2 cents above the consensus forecast of analysts polled by Thomson First Call. Revenue rose 26% to $1.75 billion from $1.39 billion a year ago, in line with analyst estimates.

As has been the case in recent quarters, attention was focused on Amazon's operating margins, which had been eroded as the company spent more on marketing and incentives such as free shipping, as well as rising fulfillment costs.

Last quarter, Amazon's operating profit of $104 million was 6% of revenue, an increase above its first-quarter operating margin of 5.7%. Analysts had been bracing for another quarter of deteriorating profit margins from Amazon, which have been a sore point with investors. Operating margins were still down from the year-ago figure of 6.2%.

The sequential improvement had analysts seeing Amazon's outlook in a brighter if somewhat cautious light. Piper Jaffray raised its price target on the stock from a bearish $30 to a more bullish $44, giving Amazon the benefit of the doubt.

One encouraging sign that Piper and other research desks pointed to was the rise of Amazon's "other" revenue, from newer businesses like co-branded credit cards and third-party sales. In particular, Amazon's Merchant.com business, in which Amazon sets up and manages the sites for other retailers, is growing at a healthy clip. Such outsourcing offers Amazon a high-margin source of revenue.