A Dark Day for Amazon

Investors certainly weren't happy with Internet giant Amazon.com (Nasdaq: AMZN) Wednesday. Shares dropped by about 14% after the company reported lower profits and a lackluster outlook for its upcoming fourth quarter, which includes the essential holiday season that's just around the corner.

Amazon said third-quarter profits dropped 44% to $30 million, or $0.07 per share, which included a $40 million pre-tax legal settlement. Excluding the settlement, Amazon would have reported net income of $50 million, or $0.12 per share. Sales increased an impressive 27% to $1.86 billion, helped along by the launch of the newest Harry Potter tome.

It doesn't hurt to flash back to last quarter -- especially considering that if you take out the legal settlement, Amazon's earnings this quarter would have been flat on a sequential basis. Perhaps most daunting for investors was the rather sedate outlook that Amazon gave for the holiday quarter and for the rest of the year.

News agencies covered the obvious elements that face this Motley Fool Stock Advisor pick at the moment -- for example, aggressive competition from many Internet companies, such as Motley Fool Rule Breakers pick Overstock.com (Nasdaq: OSTK), Buy.com, and even Wal-Mart's (NYSE: WMT) online presence. The Amazon Prime shipping plan has been getting a lot of attention because its deep discount on shipping is another of Amazon's infamous plans to sacrifice margins in the short term in order to build loyalty over the long haul.

Meanwhile, Amazon's most widely talked about and anticipated new plans may pit it squarely against some pretty tough rivals. During the company's conference call, Amazon was asked about such initiatives as digital downloads, DVD rentals, and its search engine A9.com (and it would face giants in each area, namely Apple (Nasdaq: AAPL), Netflix (Nasdaq: NFLX), and Google (Nasdaq: GOOG), respectively).

Amazon's head honcho, Jeff Bezos, gave the most color concerning digital downloads, stating that it was too early to give specific details. "But it is something that we're putting a lot of energy into with a talented team of folks," Bezos said. "And we think we have some great offerings that we can bring to our customers over time." Let's hope so, because that's an area that is pretty well dominated by Apple's iTunes at the moment.

Meanwhile, Bezos said that while DVD rental is going "very well" in the U.K. and Germany, launch in other countries is not something the company will talk about at this time. He traced some of the recent initiatives for A9.com too, while declining to give too much specific information on the search engine.

I have to admit that this quarter reminded me of some questions I have had about Amazon in recent history. Is Amazon joining the ranks of large companies that get bigger and bigger, while rivals continue to encroach, until they eventually lose touch with their loyal customer base? On the other hand, Amazon has been one of the stalwarts in the e-commerce space. It may be suffering some negative sentiment in the short term, but one can surely guess that it still has a few tricks up its sleeve for the long haul.

Amazon.com and Netflix are Motley Fool Stock Advisor recommendations; Overstock.com is a Motley Fool Rule Breakers selection.