From Good Morning Silicon Valley…

In Amazon territory, the natives are getting restless. Investors who had stuck it out through quarter after quarter despite were already worried about margins and spending. When CEO Jeff Bezos reported Wednesday second-quarter earnings were down nearly 58 percent and lowered the 2006 outlook, then announced more spending and deeper price cuts, shareholders did a double-take and said, “Not with our money, you don’t.” The stock price plummeted more than 20 percent and is now bouncing around its three-year low. The backlash chopped more than $3 billion off Amazon’s market capitalization. “I think a lot of the frustration today is because this company perpetually seems to be in a heavy investment mode,” said Philip Remek, an analyst with Guzman & Co. Analyst Dan Geiman with McAdams Wright Ragen added, “It’s gotten to the point where you just don’t know what those returns are going to be. It’s just hard to measure.” Analysts also worried that the company was spreading itself too thin and adding low-margin businesses like groceries. “What’s the competitive advantage that Amazon brings to delivering all the types of Jell-O that you could possibly want?” asked David Garrity, an analyst with Dinosaur Research.

Bezos and team defended the spending, especially on services that encourage customer loyalty like the annual flat-rate deal offered on two-day shipping, as necessary to Amazon’s longterm health. With instant price comparisons available, loyalty to an online retailer is tenuous, he said, unless the company can use service and technology to build a compelling relationship with the customer. And some analysts are still willing to give him the benefit of the doubt. Bob Toomey with E.K. Riley Advisors said, “People who follow the stock closely know or should know that Amazon’s strategy is and has been to be investing in the business for the long term.” The question is how many shareholders it will lose along the way.

Remember what Keynes said? “In the long run we are all dead”.