Amazon.com Expands

Amazon.com, trying to build itself into an online superstore, is expanding into both software and hardware -- real hardware, as in nails, sandpaper and power tools.

The new offerings, announced Tuesday, are part of a rapid expansion that is costing the money-losing Web site hundreds of millions of dollars. Now some analysts are questioning how long Amazon can continue to spill red ink before its business plan starts to crumble.

"It is still unclear how these new areas may end up effecting their spending and whether their losses will extend even further going forward," said Sara Zeilstra, an analyst at Warburg Dillion Read.

In its four years in business, Amazon has yet to report a profit.

Amazon allows anyone -- from giant multinational manufacturers to up-in-coming artists -- to sell merchandise on its Web site.

At the end of September, Amazon was the most frequently visited shopping site on the Internet, according to Web research firm Media Metrix.

Amazon's latest expansion comes at the start of all-important holiday shopping season. Amazon has said it will spend heavily this Christmas to add products and services as well as advertise its Web site.

"To not invest at this time would be incredibly shortsighted," said Jeff Bezos, Amazon's founder and chief executive.

But some investors seem to be growing less tolerant of Amazon's free spending, especially since the company is expected to lose nearly $375 million this year and has warned that it will not profitable until 2002.

After Tuesday's announcement, Bank of America downgraded Amazon's stock, which was off $6.75 at $71.25 in afternoon trading on the New York Stock Exchange. That erased more than half of Monday's $13.06@1/4 gain, which came in anticipation of an announcement of expansion plans.

"At the current level, we find it impossible to justify, based on our fundamental outlook, an adequate return on the stock over the next 12 to 18 months," Bank of America analyst Tom Courtney wrote in a research note.

Regardless of Wall Street's concerns, Amazon continues to expand into merchandise that it believes customers want to buy online. Starting Wednesday, Amazon will begin to offer computer software and broaden its selection of video games.

It will also launch a home improvement store. To build its home improvement store, Amazon recently purchased the catalog, online and distribution operations of Tool Crib of the North, a North Dakota-based company that specializes in construction, tools and woodworking equipment. Tool Crib's catalog, which is well-known in the hardware business, will continue to be published.

Analysts liked that Amazon was moving into a product category that wasn't as reliant on holiday sales. They also welcomed Amazon's alignment with an established retailer.

Amazon hopes to tap into a $145 billion home improvement market that is still quite small online

In addition, Amazon hopes to ward off any rivals by aggressively discounting and promoting its shipping policy -- $4.95 regardless of the size of the item.

Also Wednesday, Amazon will launch a new gift ideas store, which will feature a variety of possible holiday presents.

  • CBSNews.com staff CBSNews.com staff

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