Ah, yes. Valentine's Day. Some people love it, some people hate it, but let's face it -- it's a red-letter day indeed for online diamond purveyor Blue Nile (NASDAQ:NILE), with its selection of the jewels to end all jewels, and a build-your-own-engagement-ring page on its website.

I have to say, paying a visit to Blue Nile's website for research was tough work. It's sohard to gaze at lovely, sparkling diamonds on the Internet. Of course, I'm kidding. That kind of research isn't exactly difficult on the eyes. However, I wonder, are browsing and buying two different things?

That's got to be one reason why David Gardner considers this stock a Rule Breaker. A company that has been around since March 1999, Blue Nile denied convention and boldly went where others were afraid to go. After all, conventional wisdom lingers -- that people won't buy something as precious (and expensive) as a diamond on the Internet, sight unseen.

However, that's the joy in developing a market that hasn't yet been -- er -- mined yet. There was a time when conventional wisdom had it that hardly anyone would want to buy anything over the Internet that they couldn't physically see, touch, or try on. Things have, of course, changed.

Blue Nile's making it easy, though. Not only does it provide discounted diamonds, but it also provides lots of tools to do the requisite research. It also allows shoppers to build their own perfect rings, using virtual tools on its site. I'm quite sure that there's something to be said for feeling as if one has designed one's own token of love.

A material world
It may be a material world, and some may be material girls, as the song says, but there's absolutely nothing wrong with getting a better deal on a high-quality diamond, an angle that has helped Blue Nile sparkle.

Tiffany (NYSE:TIF) has the signature blue box -- which contains of course the marketing muscle of that oh-so-luxurious name -- but all these trappings of materialism don't change the fact that most of us welcome the proposition of getting a high-quality gem for less money.

Despite what naysayers may have once surmised, showcasing fine jewelry on the Internet can work. (Not to mention the fact that the low overhead of Internet retailing can do wonders for those profit margins.) Amazon.com (NASDAQ:AMZN) jumped into the jewelry game last April; one might suppose that Jeff Bezos would never have ventured into the arena if it didn't look like a lucrative one, with room for growth. RedEnvelope (NASDAQ:REDE) is certainly of that opinion, with jewelry a major segment of its wares. No doubt other e-merchants will peddle baubles and bangles, too.

You could argue that most potential grooms wouldn't dare purchase their brides' diamond rings online (Fools recently talked about a poll that suggested as much on our Rule Breakers' dedicated Blue Nile discussion board). But Blue Nile seeks to provide peace of mind: It not only offers education about diamond quality, but it also offers certification for its gems.

Overstock.com (NASDAQ:OSTK), another Rule Breaker pick, recently announced its own build-your-own-engagement-ring service on its site, but I'd agree with some of the people on our Rule Breakers discussion board: Most women would likely balk at a diamond ring that came from what sounds like a bargain basement. Of course, Overstock offers other kinds of jewelry, too, and it may sell quite well.

Meanwhile, in 2004, broadband adoption accelerated at a rapid pace, and consumers have upgraded their home computers to fantastic levels of ability. The upgrade cycle makes Internet shopping easier and bodes well for widely known Internet retailers like Blue Nile, especially given an instilled sense of trust in their wares.

Happy endings
Although Blue Nile focuses on engagement rings, it also sells other non-engagement jewelry. Such offerings will make Blue Nile an appealing destination for another emerging and important demographic: female shoppers.

Of course, Fool Rick Munarriz recently talked about dot-com seasonality, and for now, Blue Nile fits the bill. After all, there is a spike in engagement ring purchases around the holidays since it's a popular time to pop the question, and fourth-quarter numbers at Blue Nile underlined that fact. (Just think of the big splash Jude Law made recently by popping the question to young actress Sienna Miller -- reportedly, on Christmas Day. To those of you who are the biggest fans of People magazine's "Sexiest Man Alive" in 2004, I'm sorry if I've hit a nerve.)

But let's get back to Valentine's Day. It's right up there with the other winter holidays (and possibly birthdays) as the most romantic day to pop the big question. And Blue Nile was ready. It claimed recently, in a very entertaining press announcement, that flowers and candy are considered pretty crappy gifts compared to a diamond.

Fourth-quarter earnings were lower than those Blue Nile produced last year, but that's because the company dealt with higher taxes than it did last year. This time around, Blue Nile reported net income of $4.6 million, or $0.24 per share. Meanwhile, though, sales increased a whopping 30% to $64.5 million. In its conference call, Blue Nile management described the quarter as its best in company history.

Fools also will like that Blue Nile happens to have $101.4 million in cash and marketable securities on its balance sheet, and no debt. Free cash flow, one of our favorite metrics, clocked in at $27.9 million for the year, an 83% improvement over free cash flow generated last year.

Gross profit increased by 27.6% for the quarter, although gross margin slipped to 21.9% from 22.4%. Average order size at Blue Nile increased to $1,283, a 17% increase over last year. The company also said that its sales of items over $50,000 "reached an all-time high." Nice.

Making a commitment
So. Diamonds over the Internet: Yep, it's just crazy enough to work.

The biggest catalyst, in my view, is that Internet shopping is no longer the realm of early adopters, but is becoming rather ubiquitous. (No, just in case you were wondering, the biggest catalyst isn't movies like Runaway Bride, which could lead you to believe that there are women who like to ditch men at the altar, collecting the engagement rings for posterity.)

Amazon.com recently said that purchases of electronics on its website surpassed those of books for the first time ever. People once pooh-poohed the idea that anyone would buy big-ticket electronics through a website like Amazon or eBay, and look at what's happening now.

Meanwhile, alerts about e-commerce for the holidays showed that online jewelry sales doubled over last year's numbers, implying that consumers' comfort with such purchases is increasing.

These are the themes that bode well for Blue Nile. Saying "I do" to Blue Nile does involve a certain degree of risk, given an increasingly competitive battleground, fluctuations in diamond prices, and questions of how comfortable people will be with big-ticket jewelry purchases over the Internet. However, given signs and trends that indicate it has a sparkling future ahead, it's just not that hard to make a long-term commitment to this Rule Breaking stock.

To find out what stocks have been picked for grand gains, other than Blue Nile, try a free 30-day trial to Motley Fool Rule Breakers .

Alyce Lomax does not own shares of any of the companies mentioned, but the diamond is her birthstone. The Motley Fool has a disclosure policy.