Investors sold shares of Blue Nile ( NILE) on Wednesday after the online diamond merchant forecast disappointing earnings and announced a mixed quarterly report.

In recent trading, the Blue Nile's stock was off $6.12, or 18.5%, to $27.06 after trading as low as $25.86 intraday.

In the second quarter, Blue Nile earned $1.9 million, or 11 cents a share, beating analysts' estimates by 2 cents per share but down from $2.2 million, or 14 cents a share a year ago. The company's revenue rose 29% vs. the prior year's $35.0 million, but came up short of consensus estimates of $35.3 million, according to Thomson First Call.

Looking forward, Blue Nile expects to earn 5 cents to 7 cents a share in its current quarter, on sales $32.5 million to $34 million. Analysts polled by Thomson First Call had predicted earnings of 9 cents a share on $35.1 million in revenue for the third quarter.

Dan Geiman, who covers Blue Nile for McAdams Wright Ragen, wrote Wednesday that the company's second-quarter sales came in "well below" his estimate of $37.6 million. Geiman lowered his third-quarter earnings estimate, but maintained his buy rating on the stock.

"Though Blue Nile solidly beat earnings expectations, we were hoping for a little more sizzle," Geiman wrote in his note. "Nonetheless, we continue to believe that Blue Nile is attractively positioned, and therefore should continue to drive steady revenue growth and operating margin expansion."

(McAdams Wright Ragen has done investment banking for Blue Nile in the last year.)

In a statement, the company defended its quarterly results.

"Our second-quarter financial results reflect strong sales growth and speak to our unique proposition as a leading retailer of high quality diamonds and jewelry at an excellent value to consumers. Our rapid sales growth continues to be powered by increasing numbers of customers who seek our in-depth information, convenience and the ability to customize their diamond jewelry purchases," the company said.

The online jeweler said second-quarter net income was fully subject to income tax compared with the second quarter of 2003, which had no income tax expense reflected as a "result of a valuation allowance that was recorded against deferred tax assets."

Free cash flow surged to $6.4 million from $3.9 million in the year-ago quarter.

The Seattle-based company forecast full-year revenue of $162.5 million to $166.5 million with EPS of 49 cents to 53 cents a share.

The consensus forecast is for profits of 51 cents a share on $169 million in sales in 2004.

Blue Nile is only the latest Internet company to disappoint shareholders with its quarterly report.

Last week, investors sold off shares of Amazon ( AMZN) and eBay ( EBAY) after they each failed to live up to expectations. Amazon, for instance, missed consensus earnings estimates by a penny and gave a disappointing profit outlook. Likewise, eBay's earnings guidance wasn't as bullish as analysts' estimates.

Earlier this month, Yahoo! ( YHOO) received similar treatment from investors after its own disappointing earnings forecast.