Amazon.com, Inc. (NASDAQ:AMZN) released its latest quarterly results this past week, posting revenue that fell slightly, although gross margins increased. The result, as UBS analysts point out, is a sort of “tug of war between revenue and margins.”

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The story of Amazon’s revenues and margins

Analysts Eric J. Sheridan, Timothy E. Chiodo and Vishal J. Patel issued a research note to investors in the wake of the online retailer’s latest earnings report. They note that paid unit growth at Amazon.com, Inc. (NASDAQ:AMZN) continues to slow, dropping to 5 percent for the June quarter and marking the fifth quarter of deceleration.

However, margins are increasing at the company, and as a result, the revenue guidance which was a bit weaker than expected was offset by another surprise in gross margins. The company reported margins of 28.6 percent for the June quarter.

Amazon still getting benefits from the Kindle

They also note that the company continued to receive benefits from its Kindle ecosystem, which show how important hardware and software ecosystems are in terms of media consumption. North American revenues jumped 30 percent year over year, while international revenues climbed 13 percent.

The analysts believe Amazon.com, Inc. (NASDAQ:AMZN) will continue to put out new hardware, which unfortunately will be a drag on gross margins, although it will be good for the company’s ecosystem in the long run.

UBS changes estimates for Amazon

The analysts adjusted their fiscal year 2013 estimates for the company slightly in light of the recent report. They are now estimating that the company’s full-year results will be revenue of $74.4 billion, a slight decrease from their previous estimate of $74.8 billion and lower than the Wall Street consensus of $74.7 billion. They also raised their gross margin estimate to 27 percent from 26 percent.

In the third quarter, Amazon.com, Inc. (NASDAQ:AMZN) guided for revenues with a midpoint that suggests that its revenue will grow by about 18 percent year over year, which would be another deceleration from its previous results.

Amazon shares to remain range bound, gross margins remain volatile

UBS analysts raised their price target to $305 per share but maintained their Neutral rating on the stock. They believe shares of Amazon will “remain relatively range bound” in the wake of the company’s most recent results because of the mix of slowing paid unit growth and increasing margins. In their view, the only way for Amazon.com, Inc. (NASDAQ:AMZN) to break out of its current trading range is if it shows accelerating revenue growth and at least solid if not improving margins.

They do note however, that investors should pay attention to the company’s gross margins because they “could remain somewhat volatile.” They cite spending in original content, potential hardware launches and the transition in e-book accounting, which is moving from net to gross revenue recognition.

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