The company's stock climbed to a new 52-week high today, closing at 62.5 just hours after the online bookseller expanded its business to include online music sales. It plans to offer more than 100,000 CDs, becoming the latest player to enter a hotly competitive but largely money-losing business.
Despite Wall Street's optimism, Amazon faces myriad risks in the online music business. In a recent Securities and Exchange Commission filing, the company warned that CD sales could dampen results from the rest of its business.
"The company has announced plans to offer music to customers, and anticipates that music product gross margin, which is expected to be lower than book gross margin, will affect overall gross margin proportionately to its impact on product mix," Amazon said.
Amazon says it will soon expand its offerings of only 100,000 titles by adding classical music. "Once we add classical, we will definitely have the biggest selection," Amazon's senior vice president David Risher told CNET NEWS.COM recently.
In its favor, however, the firm has attracted a loyal following, which could give it a leg up on the competition.
Analysts remain mixed on whether Amazon's expansion into music sales will be successful.
"The stock's been down, and I think people need an excuse to see it recover," said Keith Benjamin, industry analyst for Robertson Stephens. He added: "We've been waiting for this for months; I'm surprised it's news, but it is."
Jupiter Communications senior analyst Regina Joseph was more skeptical of Amazon's chances for success in the online music space.
"You have a lot of companies competing for what they all recognize is a fairly small profit margin," Joseph explained, adding that, whereas Amazon was the first to sell books online, it is a late entrant to the congested field of music sales. "People are basing a lot of their stock buying decision on a past perception of Amazon. That's a pretty slippery assumption."
Other analysts chalked Amazon's run-up to a "short squeeze."