Hi, Remember Me? Internet Issues Feel Neglected

Why has Wall Street's interest cooled in Amazon.com and the rest of the Net heavies?
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At 8:25 a.m. EDT on Monday, May 17 -- about an hour before the market opened -- Reuters reported that Amazon.com (AMZN) - Get Report would offer books from The New York Times bestseller list at a 50% discount. Within a few hours barnesandnoble.com chief Jonathan Bulkeley matched the move, saying it would have a minor effect on operating margins. By day's end Borders.com joined in too. By the next day Books-A-Million (BAMM) went one better, offering its customers a 55% discount on those titles. At that point, a third of my bureau had already bought bestsellers from Amazon.com.

This was nothing less than a massive, industrywide chain reaction at Internet speed. But in trading of Amazon.com shares there was a collective yawn. On Monday, Amazon shares rose 4%. On Tuesday, they were down about the same.

What happened to the stock that made traders rewrite the book on volatility? What happened to the mother of all fickle Internet stocks?

Lifting the lid on Amazon.com's inactivity reveals a spreading malaise among mainstream Internet stocks. Since mid-April,

@Home

(ATHM) - Get Report

,

eBay

(EBAY) - Get Report

,

E*Trade

(EGRP)

,

Yahoo!

(YHOO)

and their ilk have been stalled. In technical terms: in a trading range. And they're all being worked over by several factors.

Among them is the pile of recent Internet IPOs, distracting investors hungry for Net stocks. "The flood of product has made it hard on Amazon," says Lauren Cooks Levitan, an analyst with

BancBoston Robertson Stephens

, a firm that has not participated in any Amazon.com underwriting deals. "There's this new-kid-on-the-block phenomena. People aren't really standing back and saying: What business here is really going to last?"

Another factor is seasonability. Retailers tend to think of just two seasons -- holiday and non-holiday. But among tech stocks there is a third -- summer vacation. "People don't want to own volatile tech stocks in the summer," says Marc Rice, a Chicago-based hedge fund manager who has no position in Amazon.com. "It's hard to relax on the beach when you have these things in your portfolio. Me, I don't trade Amazon at all, because it's always frustrated me."

No wonder. Tech stocks have

swooned each of the last three summers because of a variety of factors, including slow sales to vacationing Europeans. Furthermore, with potential customers spending less time at their computers in the summer, analysts have seen a pattern of soft summer revenue growth from Net stocks.

Even Amazon.com bulls are starting to wake up to the problem of shares of Amazon.com being held back by what appears to be an eroding balance sheet. Losses are expanding even faster than revenue is growing. According to

First Call

, Wall Street analysts, on average, expect Amazon.com to lose $1.71 a share this year, sharply higher than the 91-cent loss predicted a few months ago.

Still, Levitan says that the increasing expenses are a ruse. "We know Amazon is spending an awful lot of money because they've told us that," she says. "But they're not spending it on books. I think sectors of Wall Street assume these bigger losses are part of the core business today. But the core businesses are showing increases in profitability."

Levitan has her highest rating on Amazon.com, calling it a strong buy. And she believes that Amazon.com is using books and music as a Trojan horse to get into customers' homes and sell an army of products. "They're not telling the Street what they're doing," she says. "because they're trying to protect their competitive advantage."

Indeed, while some companies are issuing .com press releases to pump up their stocks, Amazon is as secretive as

Stanley Kubrick

was on his sets. Its recently launched Amazon Auctions -- a direct competitor of eBay -- was in the works long before the Street was clued in. In acquisitions, like the 35% stake of

HomeGrocer.com

taken last week and a recent sizable investment in

drugstore.com

, Amazon promotes the hell out of them but only after they're fully developed and integrated into Amazon.com's site. Levitan believes Amazon.com is spending madly so it can unleash a slew of new e-commerce companies in time for the holiday season.

"Look at what they did with auctions. They built it without telling the Street," says Levitan. "As that succeeds, we all have to adjust our revenue models. So the current revenue projections? Oh my God, they're going to blow through the revenues."

Ironically, by ignoring Wall Street, and being ignored by it (for now at least), Amazon.com may be giving the Street exactly what it's looking for -- an e-commerce juggernaut and a stock with the financial power to last.