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Thursday, July 27, 2006 - Page updated at 12:00 AM

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Amazon punished for lower forecast

Amazon.com stock took its biggest plunge in five years Wednesday, to its lowest level in three years, after the company said spending on technology and its new online toy store will hurt annual profit.

The stock dived $7.33, or 21.8 percent, to $26.26, extending a slide that started in after-hours trading Tuesday, after the Seattle-based online retailer announced its second-quarter profit had tumbled 58 percent.

Amazon will "invest heavily" in toys in the second half, Chief Financial Officer Tom Szkutak said Tuesday.

That, along with plans to cut prices "aggressively," led Amazon to reduce its estimates for the year.

Annual operating profit will be $310 million to $440 million, the company said Tuesday. In April, Amazon projected profit of as much as $520 million.

"They want to capture as many eyeballs as they can on the Internet and be the go-to place on the Internet, but that's costing them earnings, at least right now," said Tim Ghriskey at New York-based Solaris Asset Management, a former shareholder.

Several brokerages lowered their stock-price targets because of the forecast. Goldman Sachs and Citigroup reduced their price estimates 12 percent to $30. Deutsche Bank cut its estimate 18 percent to $31.

Piper Jaffray analyst Safa Rashtchy lowered his rating on Amazon.com to "underperform" from "market perform" and questioned the company's "lack of transparency."

"The company's strict code of non-disclosure continues to prevent investors from understanding the continued high levels of operating expenses," Rashtchy wrote in a research note Wednesday.

Stifel Nicolaus analyst Scott Devitt, who has a "hold" rating on Amazon's stock, said, "We have an appreciation for the business that Amazon is building and the long-term competitive advantage that increases with each incremental investment."

But, he added in a research note Wednesday, "Until the revenue and cash flow begin to show from new initiatives, we do not believe investors will pay for this stock."

Copyright © 2006 The Seattle Times Company

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