Greenspan, Amazon Give Net Sector the Heebies

Net stocks ended lower amid fears of higher rates and negativity about Amazon's quarterly results.
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SAN FRANCISCO -- Amazon.com's (AMZN) - Get Report earnings report and a cautious outlook from Fed Chairman Alan Greenspan combined to punish the Internet sector today.

TheStreet.com Internet Sector

index closed down 21.56, or 3.5%, at 593.75. A good portion of the weakness could be attributed to Amazon, which closed down 18 1/4, or 15%, at 107 3/16.

Amazon's second-quarter loss of 51 cents a share was exactly in line with estimates, but that was the first time in the past six quarters that the company did not beat Street estimates, according to

First Call

. Whisper numbers had the online retailer beating earnings by about a dime. Certainly not helping was a downgrade from

Bear Stearns

, which lowered its rating on Amazon to attractive from buy on concerns about the company's plans to spend $300 million to expand its warehouse capacity over the next two years.

But the losses appeared to revolve around ongoing concerns about just when the company will turn a profit, which doesn't appear to be anytime soon.

Merrill Lynch's

Henry Blodget noted that "profitability, if any, remains a next-millennium phenomenon." But both Blodget and

Morgan Stanley Dean Witter

analyst Mary Meeker said they expect the company to have a strong Christmas season, and Meeker suggested investors hold shares in anticipation of a "great" fourth quarter.

Amazon wasn't the only Internet bellwether to weigh on the sector.

America Online

(AOL)

closed down 4 9/16, or 4%, at 110 1/2 despite beating earnings estimates by 2 cents for its fiscal fourth quarter. AOL, which reported earnings of 13 cents a share, was likely caught up in the weakness that afflicted the entire sector as well as post-earnings profit-taking. However, there were some concerns that the 755,000 increase in the subscriber base reported by AOL was below market estimates.

Greenspan spooked the stock and Treasury markets with his

Humphrey-Hawkins

testimony before Congress. The Fed chairman said the economy may be growing too fast and it could lead to another hike in interest rates should there be signs of inflation. He also said there was a danger that recent developments in productivity growth could drive equity prices "to levels that are unsupportable even if risks in the future become relatively small." Net stocks extended losses following his comments and were never able to recover despite a rebound in the

Dow

.

While Net stocks were mostly weaker as a group, there was one success story:

Exodus Communications

(EXDS)

, which beat earnings estimates Wednesday and announced a 2-for-1 stock split. Exodus closed up 4 1/2, or 3.5%, at 132 5/8. 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.