Amazon stock tumbles on second profit warning

Shares in Amazon.com, the pioneering online retailer, are languishing at a three-year low after a second profit warning this year left Wall Street fretting over the future direction of the business.

Jeff Bezos, Amazon's founder, blamed the latest disappointment on a need to invest in the company's new online toyshop, which it created after the collapse of its partnership with Toys R Us.

But Amazon's profit for the past three months was 58 per cent below the level of a year ago and missed even the reduced forecasts made after a profit warning in February. Then, the company blamed the high costs of hiring new software engineers.

Shareholders are starting to ask what, exactly, Amazon has to show for all this investment. And they are worried that growing competition in online retailing means that Amazon's profitability may never be the same again.

Amazon shares were down more than 20 per cent at their worst yesterday, as analysts queued up to express their scepticism and one of the West Coast's most influential technology sector specialists, Piper Jaffray's Safa Rashtchy, advised trimming holdings of Amazon shares.

Dan Geiman, an analyst at McAdams Wright Ragen, said: "We find it interesting that just as the company is - apparently - taking steps to moderate these technology cost increases, another set of factors is likely to pressure margins."

At the root of the profit warning, news that Amazon has been dramatically lowering prices, not just of the products it sells but also the amount it charges for postage and for extra-fast shipping. It says annual sales growth will accelerate to more than 25 per cent because customers who get "instant gratification" from receiving their goods quickly tend to buy more. Shareholders worry, though, that Amazon may never be able to raise prices back up again.

Mr Bezos told them, in effect, to be patient. He said: "While this is certainly an expensive investment it really does build what will be a more important and bigger company over the long-term," he said. "We know that 10 years from now customers will still care about selection, they will still care about availability and price, and they will want to get their products quickly. The energy we put in today will continue to pay dividends even 10 years from now."

Amazon will be selling cut-price toys to compete against the new online offering from Toys R Us, which had previously used Amazon as its online distributor. The decision of Toys R Us to go it alone reflects the strong prospects for the growth of online shopping; it was the same reason cited by HMV in the UK, which previously used Amazon to supply books to its online customers. Competition from traditional retailers, and from the likes of eBay, is therefore hotting up.

The other threat hanging over Amazon is the looming transition from CDs and DVDs to digital music and video. The company is not yet offering music or video downloads, and shareholders are impatient lest Apple's iTunes or other download services become too powerful to compete against. Mr Bezos batted away questions on future digital product launches when facing analysts on Tuesday, although rumours continue to swirl that it will soon start offering music and movie downloads to customers who also buy the CD or DVD.

Some commentators are willing to give Amazon the benefit of the doubt for now. Jeetil Patel, technology analyst at Deutsche Bank, said the promised slowdown in spending on technology probably meant that new services are close to going live. "Big investments lead to big ideas, especially at Amazon," he said.