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Amazon Shares Plunge, But Analysts Optimistic

Shares of Amazon.complunged 15 percent on Wednesday, depressing the overall market and delivering a rude wake-up call to investors whose hopes for the online retailers' sustained profit performance had more than doubled share prices since January.

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Still, at least six brokerages raised their price targets on the company, even while some cautioned of an overvalued share price.

On Tuesday, Amazon reported a 41 percent rise in sales and third-quarter profit of $80 million, or 19 cents a share -- beating the Wall Street consensus by a penny -- compared with $19 million, or 5 cents a share, a year before.

But profit margins fell sequentially in the quarter, raising fears that recent improved performance was unsustainable.

Citigroup analyst Mark Mahaney summed up the pros and cons of owning Amazon shares in a brief note, citing accelerating revenue growth and a greater number of active customers as impressive factors helping Amazon take market share.

But he said he saw less evidence that profit margin and earnings per share growth were sustainable and wrote that "Amazon's valuation deserves tighter scrutiny."

"We continue to believe that buying Amazon here requires conviction in double-digit long-term margins, and we don't see the evidence."

Analysts from Goldman Sachs and Sanford C. Bernstein were more optimistic that profit margins would improve. Goldman Sachs' Anthony Noto wrote: "The stock should continue to work as long as margins continue to expand, which seems likely as the favorable mix shift to third-party units should drive margins."

Amazon takes a transaction commission from so-called "third-party sales," in which outside sellers post their wares on the Amazon Web site. Amazon has no fulfillment and inventory issues in that set-up, making it a higher-margin business.

Brian Pitz of Banc of America Securities said the company is a core e-commerce holding, adding that it is likely stealing market share from rival eBay Inc .

"While Q4 guidance appears conservative in our view, near-term bumps in the road could provide good buying opportunities for this key Internet holding," Pitz added.

Shares of the Web retailer fell $14.70 or almost 15 percent to $86.12 in afternoon trade on the Nasdaq, amid an overall weak market. It was Amazon's biggest daily percentage drop since July 26, 2006, when the retailer cut its outlook due to higher costs and lower pricing. Amazon was one of the biggest contributors to a 2 percent drop in the Nasdaq Composite Index. EBay shares were down 49 cents or 1.4 percent to $35.45.

Amazon shares trade at 66 times 2008 estimated earnings, a valuation over four times that of the Dow Jones Retail Index, and nearly three times that of rival eBay.

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