Amazon, the stock, just keeps rising

You’ve got to hand it to 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.