Amazon Shares Slide as Warehouse Costs Mount

The stock was off 13%, leading a widespread tech retreat.
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SAN FRANCISCO -- Barring the unlikely event that Fed Chairman Alan Greenspan deviates from prepared testimony to tout (AMZN) - Get Report, it could be a long day for Internet stocks.

The Net sector opened sharply lower as investors showed displeasure in the numbers reported by Amazon and

America Online


after the close Wednesday. Internet Sector

index was down 12.33, or 2%, at 602.98. was one of the biggest drags on the sector, down 16 7/16, or 13%, at 109. AOL was off 3 1/16, or 2.7%, at 112.

Amazon was downgraded by

Bear Stearns

to attractive from buy following its second-quarter earnings report, in which it met analysts' expectations by losing 51 cents a share. Analyst Scott Ehrens said the $300 million Amazon will spend over the next two years to expand its warehouse capacity will inevitably hurt the bottom line even if an expansion is in the company's long-term interests.

"Although we believe's management is one of the best in the Internet space, we believe the accelerated expansion of distribution center capability will be an enormous task," Ehrens wrote.

The online retailer, which also set a 2-for-1 stock split, said it added 2.3 million customer accounts in the quarter, giving it 10.7 million. The company said it expects to invest more heavily in the second half, but CFO Joy Covey said the third quarter will bring "somewhat higher" sequential revenue growth.

AOL posted fourth-quarter earnings of 13 cents a share, topping both the

First Call

estimate of 11 cents and the year-ago 6 cents. The leading Internet service provider said quarterly revenue rose to $1.38 billion from the year-ago $943 million. Somewhat disappointing was a weaker-than-expected rise in AOL's subscriber base. That figure increased by 755,000, short of analysts' estimates for a gain of 775,000 to 800,000 new subscribers.


analyst James Preissler made cautious comments about the Internet and growth after seeing AOL's numbers.

"We believe that at this point, the Internet has reached a plateau where the rate of growth has begun to decelerate," Preissler wrote. "We still obviously believe that the Internet will continue to grow at a rapid clip going forward, but perhaps at a slower rate than we have witnessed in the recent past. This is a natural outcome as the industry matures, but nonetheless could be happening earlier than anticipated."

Also among stocks that reported after the close on Wednesday,

Exodus Communications


erased early losses after beating earnings estimates and setting a 2-for-1 stock split. It was up 8 7/8, or 7%, at 137 after trading to a low of 124 1/2 early in the session.

Hambrecht & Quist

, which has done underwriting for Exodus, reiterated a buy rating, saying the company reported a "blowout quarter" and that strength in the quarter "further demonstrates Exodus' dominance in complex Web-hosting and the tremendous growth in the market."

Exodus posted a second-quarter loss of 51 cents a share, a penny narrower than the Street estimate but wider than the year-ago loss of 36 cents. Latest-quarter revenue rose 41% to $42.5 million from $30.1 million in the first quarter, and more than quadrupled from $10.1 million a year ago.