Amazon Drying Up

Updated from 4:20 p.m.

Amazon.com (AMZN Quote) sank 11% in late action Tuesday after the online retailer's earnings missed targets.

For the second quarter ended June 30, Amazon made $22 million, or 5 cents a share, down from the year-ago $52 million, or 12 cents a share. Revenue rose to $2.14 billion from $1.75 billion a year earlier.

Analysts surveyed by Thomson Financial were looking for a 7-cent profit on sales of $2.1 billion.

Operating income dropped 55% from a year ago to $47 million, due to technology and content investments, lower prices including free shipping and Amazon Prime, and a contract termination and related fee dispute.

"We're investing in Amazon Prime and future technology initiatives," said CEO Jeff Bezos. "Amazon Prime gets customers their products fast, and our investments in technology position us to innovate in seller platforms, web services, and digital. We're looking forward to the coming decrease in our year-over-year growth rates in technology spending in the second half of 2006."

Investors have been down on Amazon because of its slowing growth and thin margins, and the latest results didn't change those complaints.

"It's a very nervous, volatile market, which is not all conducive to looking long term," says Bob Toomey, an analyst with E.K. Riley Advisors,who rates the shares buy and owns them. "With Amazon you have to look long term."

Amazon needs to increase spending on technology in order to stand out from its numerous competitors. Even though this was well known, it still doesn't please Wall Street, which already is pessimistic about e-commerce companies.

Operating expenses in the latest quarter jumped 34% from a year ago to $464 million, led by gains in fulfillment, marketing and technology, the company said.

Part of those costs include Amazon Prime, the company's initiative that gives customers free shipping for an annual flat fee of $79. Investors have long questioned whether the costs associated with Amazon Prime were worth it.

"It's starting to look more and more like a traditional retailer," says Martin Pyykkonen, an analyst with Global Crown Capital who rates Amazon underweight. "At some it some point it should be valued as such."

For the third quarter, Amazon forecast operating income of $7 million to $42 million on sales of around $2.25 billion. For the year, the company expects operating income of about $375 million on revenue of around $10.4 billion.

Analysts were looking for sales of $2.21 billion for the quarter and $10.14 billion for the full year.

Shares fell $3.87 late Tuesday to $30.44.