Amazon Facing Crosscurrents

"When people talk about Amazon and e-tailing, they often compare Amazon to these very small Internet retailers," says Guzman & Co. analyst Philip Remek, who rates the shares as underperform and doesn't own them. "They're missing the point -- most Internet retail sales are conducted by the Web sites of bricks-and-motor retailers."

Even so, Amazon shares have been on a roll since the stock joined the big-cap S&P 500 index. Being added to the index tends to push up stock prices because managers whose funds mimic the index are required to buy them. Analysts covering the stock have an average target price of about $39.

To be sure, Amazon is benefiting from the soaring popularity of online sales, which comScore estimates rose 22% to $143 billion last year. Sales at Amazon gained an average of 26% during the first three quarters of 2005, but those benefits haven't translated to the bottom line, as net income fell 36% during that same time.

The question of how much benefit Amazon will see from these trends is yet to be determined, says Steve Weinstein, an analyst with Pacific Crest Securities. He has an underperform rating on Amazon and doesn't own the shares.

"My guess is that they're having slightly below-market growth in the fourth quarter," he says. "The margins on those sales continue to come under further pressure."

In addition, the Web sites of big-box retailers such as Bentonville, Ark.-based Wal-Mart are continuing to see the numbers of users grow at a higher rate than Amazon. Wal-Mart was "incredibly pleased" with the performance of its walmart.com site, says spokeswoman Amy Collela. Traffic at its site rose 40% over last year's holiday season. Even so, the company on Wednesday trimmed its fourth-quarter earnings forecast, citing disappointing holiday sales.