Amazon Shares Whacked on Margin Worries

Amazon.com reported a profit that matched forecasts and gave sales guidance that topped expectations, but concerns about the company's margins sent shares falling in after-hours trading.

Amazon's gross margin fell to 20.6 percent, compared with 23.4 percent in the third quarter and 21.3 percent in the same period last year. Analysts predicted that margins would come in at 21.4 percent.

Shares of Amazon were more than 11 percent lower in extended trading Wednesday after finishing regular market hours up marginally at $74.21.

The Web-based retailing bellwether said it earned 48 cents a share on sales of $5.7 billion, compared with a profit of 23 cents a share on revenue of $4 billion last year.

Analysts polled by Thomson Financial, on average, expected Amazon to report earnings of 48 cents a share on revenue of $5.37 billion. In October, Amazon predicted fourth-quarter revenue between $5.1 billion and $5.45 billion.

Hamed Khorsand of BWS Financial noted that gross profit margins were down from a year ago and the previous quarter.

"That was disappointing," he said. "It seems there was a lot of promotions, discounting in the quarter." The operating income outlook "doesn't look too great," he added.

Rosier Guidance

Amazon now expects first-quarter sales of $3.95 billion to $4.15 billion; analyst estimates stood at $3.95 billion for the period. For the full year, Amazon said it sees revenue coming in at $18.75 billion to $19.75 billion, well above estimates of $18.3 billion.

In December, Amazon said the 2007 holiday shopping season was its best to date. The company said its busiest day was Dec. 10, on which customers ordered more than 5.4 million items.

Amazon also said in December that it added music downloads from Warner Music Group to its Amazon MP3 online digital music store. Amazon MP3 sells songs without the copy protection software known as digital rights management, or DRM. Without DRM, songs can be played on multiple digital music players.

Amazon was one of the high-flying tech stocks in the latter half of 2007, but much of that gain was lost in a recent sector sell-off on recession fears and disappointing forecasts from Apple , eBay and Yahoo . Wall Street concerns center on how Amazon, the most popular Web e-commerce site behind eBay, will fare in a recession.

Shares of Amazon trade at 67 times estimated 2008 earnings, well above the Amex Internet Index average of 19. EBay and retail giant Wal-Mart Stores , meanwhile, are valued at 16 times forward-looking estimated earnings.

- Reuters contributed to this report.

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