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Amazon slips as some analysts downgrade

For the first time in perhaps Inc.'s history, the hallelujah chorus stayed home as a few Wall Street analysts downgraded the company as expenses continue to balloon.

In early trading Thursday, shares were down 10 percent to 68 3/8.

Amazon (Nasdaq: AMZN) has had a free ride in previous quarters as management continued to "invest in the future" and report heavy losses. Analysts bought into CEO Jeff Bezos' just-trust-us guidance for upcoming quarters in hopes Amazon could become an e-commerce growth machine.

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But ballooning expenses in the third quarter and guidance that Amazon will triple its marketing expenses while continuing to invest in the future finally caught up to the company.

CE Unterberg Towbin downgraded the company to a "long-term buy" from a "buy," Merrill Lynch cut the stock to "near term accumulate" from a "near term buy" and Prudential Securities cut Amazon to a "hold" from a "strong buy."

Other firms -- Hambrecht & Quist, CS First Boston, Morgan Stanley and Donaldson Lufkin & Jenrette -- reiterated the equivalent of buy or strong buy ratings on Amazon.

But the three downgrades illustrate growing impatience with Amazon's projected losses.

"It was the first time on an Amazon conference call that the hallelujah chorus stayed home," said Dalton Chandler, an analyst with Needham & Co., who maintains a "hold" rating.

The usual quarter checked in with a smaller-than-expected loss in its third quarter Wednesday, losing $86 million, or 26 cents a share, on sales of $356 million.

In the quarter, added 2.4 million new accounts, bringing its total to 13.1 million accounts, up 190 percent from the 4.5 million accounts it held in the year-ago quarter.

Profit margins, however, will fall in the fourth quarter due to increased investment in new services, marketing expenditures and extra personnel to handle the frenetic holiday shopping season.

Bezos said the company will triple its marketing budget from the previous quarter and that operating expenses compared to total sales will remain the same or slightly higher than the third quarter.

Bezos said Amazon was managing the business to seize the "insurmountable opportunity'' of the Internet.

Where's the roadmap?

What had analyst most annoyed about Amazon was its ever-changing plan and losses. Analysts are mostly in the dark about Amazon's plans and where it's headed.

"It does seem the plan changes every quarter. We really want to see a roadmap," said Chandler. "Just lay out the plan -- say 'here's how it works.'"

"The approach historically has been 'just trust us,'" said Chandler, who added he would be comfortable with Amazon changing its plan over time.

Analysts said that Amazon may be opening up a bit and could break out sales and results for its various product lines beginning in the first quarter next year. Officials hinted that the company's U.S. book business may be profitable in the fourth quarter.

"The further we go into this the more we find new things to do, and we think it's OK to update our plans as we go," Bezos said. "In fact we think it would be really foolish to slavishly commit to plans that we made in the past when we're in an environment that's so rapidly changing."

The backlash

That guidance didn't sit well with analysts.

"We are left with the grim realization that Amazon should be working on a variable gross profit margin of 2 percent to 3 percent in the fourth quarter," wrote Mark Rower, an analyst with Prudential Securities in a report. Rower said his margin projection includes fulfillment costs, which he argues should be factored into Amazon's costs.

Rower said Amazon is still building a leading brand, but " it could take a significant period of time before shareholders benefit from the company's investments."

Merrill Lynch analyst Henry Blodget, a long-time Amazon bull, echoed Rower's sentiments. "We continue to believe that Amazon will win the e-commerce game, one day becoming a huge, profitable powerhouse," he wrote in a report. "At some point soon, however, we believe investors will become as tired as we are of endless postponement of gratification."

Blodget upped his1999 loss estimate from $1 a share to $1.14 a share. For 2000, he raised his loss estimate from 92 cents a share to $1 a share. "Don't get too comfortable with the loss estimates, however, because they may well quadruple next quarter," he said.

Big fourth quarter

All this Wall Street rumbling means Amazon has to deliver a big fourth quarter.

Bezos said he was optimistic about the holiday quarter and expected revenue and customer accounts to be up significantly.

Indeed, the expectations are already rising.

Chandler is looking for fourth quarter sales of $525 million and could be on the low-end of the range. Blodget is expecting sales of $550 million and Rower is looking for sales of $535 million.

Investors already seem to be banking on a big fourth quarter. "After a dip this morning, Amazon may well trade up for the rest of the year on the holiday hype (we continue to believe that the company's Q4 will be 2X-3X last year's)," said Blodget.