Shares Tumble on Report of Lower Margins

Shares of Web retailer slid Friday as investors and analysts reacted to its report of lower margins in the fourth quarter.

On Thursday, posted fourth-quarter profit that came in well behind the year-ago period, but still beat Wall Street expectations.

Shares rose in aftermarket trading, but sank when the market opened Friday as analysts picked apart the implications of lower pro-forma operating margins year-over-year.

Deutsche Bank analyst Jeetil Patel wrote in a note to investors that while holiday sales of high-priced consumer electronics, including Nintendo's Wii video game console and digital cameras, helped boost the top line, they also dragged down margins.

The transition to stock its own toys and games inventory, rather than relying on the now-defunct partnership with Toys 'R' Us, also cut into margins, Patel wrote.

The analyst maintained a "Hold" rating, and raised his price target for the stock to $37 for $35.

"While we continue to expect R&D spend to increase on an absolute dollar basis through 2007 as Amazon invests in its seller platforms, web services and digital products, we expect the growth trend to continue to slow as much of Amazon's platform is now fully scaleable," he wrote.

Citigroup analyst Mark Mahaney took a more dire tone, in a note to investors filled with all-capital-letter phrases and exclamation points.

"This has to have been a thesis changer for Amazon bulls," he wrote.

The analyst reiterated his "Sell" rating on the stock, and wrote that aggressive pricing and shipping promotions also weighed on margins.

And Bear Stearns analyst Robert Peck hacked his rating down to "Underperform" from "Outperform" on the stock.

"Amazon is a pioneer with a bright long-term future," he wrote, but "as we watch gross margins decline for the fourth consecutive quarter year-over-year and 2007 operating margin guidance lower than 2006, we think the near-term performance of the stock will be challenging."