Blue Nile Shares Dropped: What You Need to Know

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Disappointing earnings had investors shipping Blue Nile (NAS: NILE) down the river this morning, as the stock dropped 10.5% on bad news. It's pared the losses somewhat since, however.

So what: What caused the sell-off? Well, there was an earnings miss to begin with -- Nile earned $0.19 per share in the second quarter, versus Street expectations of $0.21. The real damage, though, I suspect, came when Nile warned investors that it was going to fall at least a nickel short of third quarter estimates, which currently have Nile pegged for $0.22 per share.

Now what: Between the second-quarter miss that just happened, and the third-quarter miss that probably will, you have to expect analyst full-year profit estimates to walk back to about $1 a share, or less. If that's how things work out, Nile today costs about 35 times current year earnings -- a pretty price to pay for a stock the Street thought would fall short of 18% long-term growth even before the earnings warning.

I think investors got it right the first time, when they sold off Blue Nile shares in droves. My hunch: We end the day with Nile losing something closer to the original 10.5% than to the 4.5% it's currently losing.

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At the time thisarticle was published Fool contributorRich Smithdoes not own (or short) shares of Blue Nile. The Motley Fool has adisclosure policy.Motley Fool newsletter serviceshave recommended buying shares of Blue Nile. Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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