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Summary:

You’ve got to hand it to Amazon.com. For bulls and bears alike, the stock keeps making as many sudden and unpredictable turns as a Harry Potter novel. And it inspires as much debate as a passionate screed from Al Gore or Christopher Hitchens. Of course, the […]

You’ve got to hand it to Amazon.com. For bulls and bears alike, the stock keeps making as many sudden and unpredictable turns as a Harry Potter novel. And it inspires as much debate as a passionate screed from Al Gore or Christopher Hitchens.

Of course, the plot turns have been much more enjoyable for the bulls in recent weeks. After reporting its earnings for the first-quarter, traditionally a sleepy one for retail, the stock rallied 40% in two days. Amazon did in the quarter what few were expecting – it showed it was serious about pushing down margins that had been eroding for quarters.

Many observers, including myself, believed that surge was just a short squeeze that wouldn’t last long. We were wrong: The stock has pushed further to $73.31 last week, another 17% gain, largely on the back of its decision to sell DRM-free music tracks.

Few stocks can make moves like that without raising eyebrows. But we all know that’s just Amazon being Amazon – the stock operates according to its indigenous logic. As it turns another page to open up a new chapter, now is a good time to ask: Is Amazon finally too expensive? To answer that, it helps to review its short history:

In 1994, Jeff Bezos stared into a browser and saw a way to radically simplify the way we all shop. The idea let him take company public; but as the stock soared and Amazon expanded, the debt piled up. Bears predicted losses piling up until they drowned the company, but Amazon turned profitable in 2002, single-handedly kindling a tech recovery in the ashes of the dot-com bust.

But the bears wouldn’t admit defeat: Amazon wasn’t a technology company but just another retailer, they said – worse, a retailer with grimly low profit margins. But Amazon forged into new technologies, many successful (S3, Web services) and some not (Unbox). The 80% gain in Amazon’s stock in the last three months should shut down the Amazon’s-just-a-retailer argument, but also amplify the debate over its stock’s value.

amazon-chart.gifYou can see the whole epic in a glance in its one-decade stock chart. It almost looks like Amazon’s headed back up to the territory it charted during the last bubble.

Valuation-wise, Amazon is about as pricey as it’s been ever since it turned a profit. It’s trading at 55.7 times its forward earnings, even after analysts have repeatedly upped their profit forecasts. In early October 2003, right before the stock began a slow but rocky slide from $60 to $25, its P/E ratio was only slightly higher, at 58.9.

I like Amazon as a (technology) company, and think its underlying operations are strong and poised for more growth. For that reason, I am glad to see it’s not being beaten down by the bears anymore. But also for that reason, I hope it doesn’t surge much farther away from a sober valuation.

If it does, it would give the bears and the shorts another excuse to pummel the stock. But I suppose it would also open the door to yet another sequel in Amazon and Bezos’ excellent adventure.

  1. I used to work at Amazon – it’s not that good of a technology company. There are fundemental problems, most notabily a massive outflux of the top talent. The question you should ask any amazonian is “why are you still at amazon? can’t get a job elsewhere?”

    So many people I know who were there for years left recently, as did I. Amazon is a tribal knowledge company, and the tribe is disbanding. Now, bet your business on S3/EC2 – I wouldn’t invest in you.

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  2. it is a short squeeze, you were just wrong to think it would be short lived. in a positive environment, a short squeeze can juice a stock for a year

    always read the short interest on a stock you are going to short! the dumbest thing you can do is to short a stock lots of other people are shorting. remember each short must end in a BUY

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  3. It’ll be interesting to see where AMZN will go in 5 yrs. I think it’s a safe investment for the time being but with the market in it’s peak, who knows what could be said in the next year or so…

    A.G

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  4. Seattle! Seattle! Wonder when the song is realeased

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  5. Amazon is the go to place for books, dvds, and soon DRM free music. I see Amazon as one of the few trusted names in on-line media distribution and should continue to watch their stock rise as well as their overall services such as alexa and other things to come.

    http://ThunkDifferent.com

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  6. I have been buying 09 puts on this thing. It ran too far too fast. Momentum is one thing, backing up those numbers is quite another. I love the service and use it all the time, but just because it’s popular doesn’t mean it can support these ratios.

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  7. I think it’s time to sell amazon stock. The retail industry at present is not up to par, and this mess we have for a national election is not going to help improve the situation. Sell the stock and take some profit, wait for the stock price to decline and buy it back. I believe it will decline.

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