Blue Nile's Diamond Business Threatened By Amazon.com

Blue Nile’s (NILE) position in the online diamond retailing market could be threatened by a more aggressive move into the segment by Amazon.com (AMZN), Lehman analyst Douglas Anmuth asserted Wednesday.

Anmuth says NILE “continues to be one of the premier small-cap Internet companies,” but that recent stock appreciation has increased risk levels. More importantly, he writes that it is “increasingly likely” that Amazon “will accelerate its efforts in this area.”

He notes that the most likely scenario is that Amazon opens a free-standing online diamond store, not unlike Shopbop.com (an Amazon-owned site that sells women’s clothes) and Endless.com (an Amazon site which sells shoes and handbags).

“Given the overall size of the domestic diamond jewelry market - approximately $20 billion in non-engagement diamonds and another $5 billion in engagement - and Amazon’s commitment across the retail space, we believe Amazon will accelerate its efforts toward the high end,” Anmuth writes.

Anmuth also says that one possibility would be for Amazon to buy Blue Nile, but he think it is more likely to build out its own stand-alone store (he does note, however, that not only are both companies based in Seattle, but Amazon has offices in the same building in which Blue Nile is headquartered).

Blue Nile Wednesday is down 27 cents st $52.90; Amazon is up $3.09 at $71.97.