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Blue Nile: A Fit For Amazon

Four months ago, Scott Devitt of Legg Mason Wood Walker downgraded online diamond retailer Blue Nile () from ``buy'' to ``hold'' partly because of slow order growth -- and because venture capitalists still owned 15% of the stock. On Oct. 3 he raised it back to ``buy.'' Why? Orders have picked up -- to above 11% -- and the VCs have moved on. And, in a report, Devitt said that Nile would be a perfect fit for (), which also sells diamonds. That lifted the stock from 32 to 35 in a day. It is now at 33. ``It's rare that we'd recommend an acquisition for Amazon,'' says Devitt, but Nile is a unique example of a logical buy for Amazon. Nile's business model is akin to Amazon's, which focuses on inefficient markets, he notes. His target for the stock is 40. Fidelity Investments owns 15%, and Morgan Stanley () 9.5%. Devitt expects earnings of 75 cents in 2005 and $1 in 2006, vs. 2004's 56 cents. Nile CEO Mark Vadon declined comment. Amazon spokesperson Jani Strand declined comment.

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them. By Gene G. Marcial

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