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Amazon Bridges Troubled Waters

With shares up big, all seems to be going according to plan.

Amazon (AMZN) - Get Amazon.com, Inc. Report heads into its fourth-quarter earnings Thursday on a roll: It was a record season for online shopping, and Amazon is one of the best-performing Internet stocks since it last announced earnings.

Shares of Amazon have risen 11.5% after its October earnings, outpacing all large-cap Internet stocks except

Yahoo!

(YHOO)

and

InterActiveCorp

(IACI)

in the three-month period.

In addition, Amazon's gains have nearly doubled that of the

Nasdaq Composite

.

The stock has also breezed passed its summer 2006 trading level of $34 right before disappointing second-quarter earnings sent it nose-diving to $26. Shares of the company closed Wednesday's regular session up 62 cents to $37.67.

The online retailer's newfound hope stems from the belief that things are going according to plan -- even though that plan isn't exactly the one the Street has been recommending.

Analysts expect the retail giant's revenue to continue its impressive increases, even though Amazon keeps shrugging off their calls to rein in discount offers and investments in favor of raising margins.

For the December quarter, analysts surveyed by Thomson First Call expect Amazon to report earnings of 21 cents a share on revenue of $3.78 billion. That would amount to a jump in revenue of nearly 27% from the same quarter a year ago.

Analysts expect full-year earnings of 43 cents on revenue of $10.49 billion -- a gain of 19% from an already large revenue number.

But new incentives in the online shoe and handbag markets is the latest sign that Amazon, which continues to offer sizable discounts such as free overnight shipping for select items, has little intention of curbing measures to keep boosting revenue.

For example, the company's retail unit for those items, dubbed Endless, recently announced a $5 rebate offer along with free overnight shipping.

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"That's just another part of their strategy to expand into new markets, and they are willing to invest to build a position in what they think are attractive markets," says Robert Toomey, an analyst at EK Riley Advisors. "This is a company that very much thinks in the long term."

Toomey, whose firm has no business relationship with Amazon but who is long shares of the company, expects EPS of 25 cents on revenue of $3.8 billion for the fourth quarter.

He believes investors will see the returns from Amazon's investment in technology start to materialize in early 2007.

Toomey also expects the company's closely scrutinized operating margins to continue edging upward from 5.5% in the third quarter to 5.8% this quarter.

Aside from Amazon's bread-and-butter retail business, investors will also be looking to hear about progress in some of the company's more novel initiatives.

During the fourth quarter, Amazon stepped up its efforts to take advantage of its massive

investments in technology infrastructure.

Power Points

Though necessary for peak times and future growth, most of Amazon's storage and computing power largely goes untapped. But Amazon is pioneering a way to take advantage of its excess technology capacity -- the case at most large Internet companies -- through a pair of initiatives aimed at small businesses.

Amazon's Simple Storage Service sells empty space on the company's sea of servers to start-ps such as ElephantDrive, and its Elastic Compute Cloud 2 platform sells the latent computing power in the company's technology grid to another start-up, Powerset, a high-profile search company that aims to outdo

Google

.

In November, Amazon CEO Jeff Bezos graced the cover of

BusinessWeek

and took the stage at prominent technology conferences to plug the services, likely a considerable focus for the company.

Although the new services may not constitute a major strategic effort for Amazon just yet, they could go a long way in alleviating one of the company's big headaches down the road.

"Our biggest cost is not power or servers or people. It's lack of

computing infrastructure utilization. It dominates all other costs," Bezos said in November.

Progress on Amazon's Unbox service, which lets users download videos, will likely also be featured. The service was criticized for its glitches and slow speeds when it debuted in November, and evidence of real progress in the demanding endeavor will reflect well on the company's technical prowess.

Along with a bullish report for its highly profitable retail business, a healthy progress report on some of Amazon's more daring ventures should render investors more confident that the company knows what it's doing -- even if they don't initially agree.