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Amazon Tide Turns

Early gains disappear as margin concerns reappear.

Updated from 7:35 a.m. EST

Shares of

Amazon.com

(AMZN) - Get Amazon.com, Inc. Report

slipped Friday after investor concerns about margins returned to take the shine off the company's fourth-quarter earnings beat.

The stock was recently off 4.6% to $36.92 in recent trading, after initially climbing as much as 3% late Thursday after the earnings report.

The company said net income fell to $98 million, or 23 cents a share, from $199 million, or 47 cents a share, a year earlier; operating expenses rose to $653 million from $502 million a year earlier.

Sales came in at $3.99 billion in the fourth quarter, compared with $2.98 billion a year ago.

The results surpassed the consensus analyst survey of Thomson Financial, which had expected Amazon to report earnings of 21 cents on revenue of $3.78 billion.

Early Friday, shares of Amazon were downgraded by Bear Stearns, which said they've watched gross margins decline for the fourth consecutive quarter, and with 2007 operating margin guidance lower than 2006, they believe the near-term performance of the stock will be challenging.

Amazon's operating income came in at $197 million, as compared with $165 million for the same period a year ago. But operating margin edged lower because of the disproportionate rise in sales. Amazon reported operating margins of 4.9% compared with 5.5% a year ago.

For the first quarter under way, the online retailer said it expects sales of $2.85 billion to $3 billion, above Wall Street expectations of $2.76 billion.

For the 2007 full year, Amazon said it expects sales of between $13 billion and $13.7 billion, above Wall Street expectations of $12.5 billion.

Here, again, however, margins tempered the bullish revenue guidance. Several sell-side notes on Friday noted that the company's 2007 operating income guidance -- $595 million at the midpoint -- implied that full-year margins would fall in 2007.

Despite frequent concerns about the steep discounts Amazon offers to keep revenue growing at a fast clip, the company rolled out another promotion in the fourth quarter. Amazon announced the beta launch of Endless, a new shoe-and-handbag site that provides free overnight shipping, a 365-day return policy and a 110% guarantee; it recently offered a $5 rebate on items until February.

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While Amazon is happy with the adoption of Endless thus far, the company has not considered offering similarly aggressive promotions such as rebates for its other sites, Bezos said in a conference call for investors.

"This is an unusual promotion we are doing to draw attention to Endless so we can introduce it to users, and so far, it is working effectively," Bezos said in response to a question about whether Amazon was testing practices that might be broadened to other products.

Still, Amazon's diminished operating margins were a topic of discussion, and the company again said that it would juggle short-term cash gains with what it considered to be its long-term growth prospects. "Operating margins and operating profit is certainly a focus," Amazon CFO Tom Szkutak said. "We are seeking to maximize our free cash flow dollars and there is a lot of room in that department," he said.

And while Szkutak maintained a generally upbeat tone about Amazon's high-profile Web services endeavors such as Simple Storage Service, which sells empty space on the company's sea of servers, and Elastic Compute Cloud 2, which sells computing power, he cautioned that it would be some time before they helped the company's bottom line.

The services are "getting a lot of adoption,

Web developers love them, and they get a lot of buzz in the blogosphere," Szkutak said. "But in terms of financials, it will take some time before they have enough scale to have a meaningful impact given the scale of our other businesses. When you have a $10 billion business, it will take many years for those services to be visible, but they are still dong great."

With regard to the company's ambitious Unbox video-download service, which was criticized on its launch last year for glitches and poor performance, Amazon tended to hold its cards close to its vest. Asked about progress of the service, Szkutak said that "there are still a bunch of things in the pipeline that we will be rolling out, so I encourage you to stay tuned."

Bezos later added that Amazon continues to add selections to the service and that it's doing well in terms of repeat customers. He also said that demand is the strongest for television shows and hard-to-find videos. But on the whole, Amazon did not provide much concrete information about progress.

The company also declined to answer whether the release of popular video game consoles such as the

Nintendo

(NTDOY)

Wii and

Sony's

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Playstation 3 had contributed in any real way to the company's strong revenue numbers during the holiday season.

During the year, Amazon said it repurchased 8 million shares, or $252 million worth, under its previously announced authorization to repurchase up to $500 million of its stock.