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Intense competition for online dollars could force


to step up marketing and technology spending in 2005, pressuring its margins, Smith Barney argued in a research note.

The brokerage cut the stock to sell from hold and left its price target at $40. The stock closed Monday at $44.52 and was recently down $1.67, or 3.5%, to $42.85 in premarket trading.

Smith Barney sees Amazon's overall North American sales growing a healthy 15% to 18% during the holiday period, but predicted that would be 5 percentage points below the general ecommerce trend. Web sites operated by non-Internet companies also performed well over the holidays, the brokerage noted.

"To protect its early lead as traditional retailers focus more and perform better online, we believe Amazon will spend more on marketing and technology," Smith Barney wrote.

"Despite the vigor of ecommerce, we believe that increasing competition will limit Amazon's margin expansion opportunities, and near-term profit figures may not support a share price that has climbed 27% in just over two months," it wrote.

The $40 price target reflects a valuation of 25 to 30 times the 2005 estimate of earnings before interest, taxes, depreciation and amortization.