Updated from 12:05 p.m. EDT

Shares of

Overstock.com

(OSTK) - Get Report

fell more than 12% Tuesday after an analyst downgrade.

The online liquidator is likely doing well this quarter and appears to be taking market share over the long term, said Scott Devitt, an analyst at Legg Mason, in a report issued Tuesday morning. But after rising 44% since late October, the company's stock price risks getting out of sync with its underlying business, he said.

"The stock's rapid rise gives us reason to believe that others are beginning to conclude that Overstock's business is not only viable but also has the potential to generate significant cash flow over time, a premise with which we agree. We believe that the shares now reflect the opportunity," Devitt said, explaining why he downgraded the stock from a buy rating to a hold.

(Overstock was an investment banking client of Legg Mason in the last year.)

Overstock's shares closed regular trading off $9.35, or 12.3%, to $66.70. In after-hours trading, the stock was recently off another 34 cents, or 0.5%, to $66.36.

The stock's decline came amid a broader selloff among the e-commerce stocks. Online giants

eBay

(EBAY) - Get Report

and

Amazon

(AMZN) - Get Report

, for instance, saw their stocks fall 3% and 2%, respectively, on Tuesday. Smaller players such as

eCost

( ECST),

GSI Commerce

( GSIC) and

Blue Nile

(NILE)

also took a hit, as their shares fell 10%, 3% and 1%, respectively.

Meanwhile, price-comparison site

Shopping.com

(SHOP) - Get Report

saw its stock drop nearly 8%. The downturn was the second sharp selloff in a row for the company, which was the subject of a negative

analyst report on Monday.

Overstock's shares have boomed this year as its business has improved. In the first three quarters of this year, the company has cut its net loss by 15% from the same period last year on sales that have more than doubled. Even factoring in an accounting change last year that helped boost the company's sales, its revenue gains have been impressive.

Investors seem to have noticed. Overstock's share price has risen about 235% in the year to date. That rise includes Tuesday's selloff, and came despite the dilutive effect of the two

public stock offerings the company has held this year to raise cash.

Overstock appears to be carving a niche for itself between Amazon.com and eBay, Devitt said. The company offers consumers an opportunity to buy the same types of discounted and excess products they could find on eBay at the fixed prices and with the customer service experience that they might get from Amazon, he said.

The problem is that the stock has now priced in the improvement in Overstock's business, Devitt said. In order for the stock to rise further, the company's underlying business will have to improve.

Among the factors that could trigger a further appreciation in the company's shares would be continued market-share gains, significant adoption of its new auction site by buyers and sellers, and operating margins that improved beyond 6%, Devitt said.

"We believe that Overstock is taking market share in the quarter and will continue to do so in the future. However, we believe it seems prudent to step aside and allow the business to catch up to the share price," Devitt said.