Amazon Sinks Under Weight of Valuation

Amazon.com's Delight-O-Meter was whirling at record pace this holiday season, but the company's record sales weren't enough to convince some investors to stick with its stock.

Amazon AMZN shares fell $1.51, or 7.4%, to $18.79 in afternoon trading on Friday. The selloff marked the second-straight day that Amazon shares fell more than 7%, with the volume of shares traded each day more than doubling the daily average for the month.

Analysts attributed the selloff to profit-taking, disappointing sales for the retail industry as a whole and e-commerce sales that weren't as high as expected -- or as high as investors might have hoped. Additionally, Forbes.com reported Thursday that Professional Timing Service, an investment newsletter, has recommended that investors short Amazon shares.

"We're almost seeing a reversal of momentum for Amazon," said Safa Rashtchy, who covers the company for U.S. Bancorp Piper Jaffray. (Piper Jaffray does not have any investment banking business with Amazon.)

Amazon shares have done well overall this year, climbing more than 75% in the year to date. The company's shares peaked at $25 a share earlier this month.

Investors, especially institutional investors, may be trying to lock in some of the gains they've seen in Amazon before the year closes, said Steve Weinstein, who covers Amazon for Pacific Crest Securities.

"It's been a tough year to be a portfolio manager," Weinstein said. (Pacific Crest does not have any investment banking business with Amazon.)

But the company's stock performance has given rise to increasing questions about valuation. Amazon, which has posted a profit on a quarterly basis only once and never on a yearly basis, is currently trading at 169 times projected 2002 earnings and 85 times its projected 2003 earnings, according to Thomson Financial/First Call. Amazon's price to 2002 earnings ratio is twice that of e-commerce rival eBay EBAY, which has consistently posted profits and higher revenue growth than Amazon.