Shares of

Blue Nile

(NILE)

continued to drift lower on Friday, three days after the company alarmed investors with a

report of slowing growth and rising wholesale costs.

Those concerns came amid existing worries about the company's steep valuation and the end of a post-public offering lock-up period on shares held by insiders.

Blue Nile's third-quarter results, which it reported Tuesday, "indicate several of these factors continue to challenge

the company and will continue to negatively impact both earnings and stock price going forward," wrote Mike Loughran, an analyst for the Robbins Group, in a report issued earlier this week. (The Robbins Group does not have investment banking business with Blue Nile.)

Blue Nile's stock closed regular trading on Friday off $2.91, or 10.7%, to $24.30. Since the company reported its third-quarter earnings, its stock has fallen $10.70, or 30.5%.

Wholesale prices of diamonds and precious metals have been on the rise in recent months. That has been bad news for Blue Nile, because it does not carry an inventory of loose diamonds. Instead, it purchases diamonds from its suppliers after customers have ordered them from the company.

That means the company is much more at the mercy of changing costs than traditional retailers who often hold inventory for a year or longer. In turn, Blue Nile has passed those rising costs on to consumers. Because the company has tended to lure customers in by offering significantly lower prices than those found at brick-and-mortar stores, the result of the rising prices has been slowing sales.

In the third quarter, Blue Nile's sales grew 23% over the same period a year earlier. That was down from 45% revenue growth in the first quarter this year.

Even if diamond prices stabilize in the near term, Blue Nile's pricing problem likely won't go away anytime soon, Loughran said. That's because the company's offline competitors likely won't need to pass on rising diamond costs for another year or so, when they turn over their current inventory, he said.

"This 10-12 months gives the

Costcos

(COST) - Get Report

,

Amazons

(AMZN) - Get Report

and other deep-heeled competitors a good chunk of time to catch up and mimic

Blue Nile's site

and search capabilities," Loughran said in an email.

That concern with competition added to worries about the company's already pricey valuation. Before the selloff, Blue Nile was trading at about 50 times its predicted 2005 earnings.

That seems like a lot considering the company's share price could take a hit in coming months as the lock-up expires on some 13.5 million shares held by insiders. That number of shares represents about three times the company's current float of 4.3 million shares.

While all those concerns are likely weighing on Blue Nile's stock, some analysts remain optimistic. The company's growth should re-accelerate once diamond prices stabilize, said Dan Geiman, who covers the company for McAdams Wright Ragen.

"I think there's still plenty of growth prospects out there," Geiman said. "I'm still positive on the story."

McAdams Wright Ragen does not have current investment banking business with Blue Nile, but was involved with the company's initial public offering in May, Geiman said.

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