Amazon's Gains Dry Up

Updated from 4:22 p.m.

Amazon.com ( AMZN) slid 9% late Tuesday after the giant online retailer's third-quarter numbers showed that competition is taking its toll.

The Seattle-based company made $30 million, or 7 cents a share, for its third quarter ended Sept. 30, down from the year-ago $54 million, or 13 cents a share. Revenue rose to $1.86 billion from $1.46 billion a year earlier.

The company said latest-quarter numbers were hit by a $40 million legal settlement in a patent case. Excluding those costs, third-quarter earnings were 12 cents a share, 2 cents ahead of the Thomson First Call analyst consensus estimate.

Operating income fell 32% from a year ago to $55 million. Excluding the $40 million legal settlement, operating income would have increased 17% to $95 million. Shipping costs rose 25%, a distressing number for investors keeping close watch on margins.

"The Q3 numbers were OK," said Martin Pyykkonen, an analyst with Hoefer & Arnett who rates the shares sell. "There was a bet by the bulls on the stock that maybe high gasoline prices would cause more people to shop online. You are not really seeing that."

Amazon also guided toward fourth-quarter sales of $3 billion, against the $3.08 billion Wall Street estimate. The company said operating income should range between $135 million and $210 million for the quarter.

"The profit guidance isn't that exciting," said Safa Rashtchy, an analyst with Pipper Jaffray who rates Amazon shares market perform. "The gross margins contracted in the quarter. That's not a good sign."

"People wanted to see a lot better expectations out of the company than this," said Pyykkonen. He noted that Amazon is guiding toward fourth-quarter sales growth of 12%-24%, but last year saw fourth-quarter sales jump 31%.

Late Tuesday, Amazon shares fell $4.23 to $42.70.

Amazon faces increasing competition for customers as the stream of new online users is starting to dwindle. Investors will be looking for signs of pressure on the company's profit margin, which has been in the spotlight as Amazon spends more on marketing and incentives such as free shipping, as well as rising fulfillment costs.

Before their late Tuesday slide, Amazon shares were near a 52-week high, having jumped more than 30% in the last year. Amazon showed last quarter that, despite concerns about its margins, the company is capable of expanding sales while maintaining profitability. Amazon shares surged 12% in a day after the online retailer posted strong second-quarter numbers.

Still, a number of metrics point to increased competition. Amazon had 43 million unique visitors to its Web sites in September, up 25% from a year earlier, according to comScore Media Metrix. That growth lagged behind the 83% increase seen by retail giant Target ( TGT), as well as Wal-Mart's ( WMT) 46% jump and a 27% gain at Best Buy ( BBY).

Earlier this year, Circuit City ( CC) and Amazon ended an agreement that had allowed Amazon customers to pick up electronics purchased on the Web site at Circuit City stories.

Last month, Buy.com declared what it called a price war against its larger rival, promising to sell books at 10% below Amazon's prices. Overstock.com ( OSTK) says its prices are 25% cheaper than Amazon's on "bestselling" books.

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