eBay Experience Bodes Ill for Amazon.com

Even before eBay's report late Wednesday, investors were expecting more of the same for it and Amazon.

"I think they're going to get beat up no matter what they report," Susan Fulton, president of investment firm Fulton Breakefield Broenniman, said earlier this week. Fulton, whose fund is long both Amazon and eBay, added: "The Street seems to have decided. This [month] they hate Net stocks."

Indeed, TheStreet.com's Internet index is down more than 12% since June 30. In recent trading Thursday, the index was off 2%.

Internet investors may have only themselves to blame for the selloff: Despite recent weakness, eBay shares are up 14% year to date and a whopping 191% since their nadir in October 2002. Though Amazon's shares have fallen 16% this year, they're still up nearly 165% since the fall of 2002.

Those spectacular gains pushed both companies' price-to-earnings ratios to precarious levels. Even after its recent selloff, eBay is still trading at about 66 times its projected 2004 earnings based on generally accepted accounting principles; that valuation doesn't include stock option expenses, which would slash eBay's earnings dramatically. Amazon is trading at about 46 times projected GAAP earnings -- more reasonable than eBay, but still high by traditional standards.

Even factoring in both companies' healthy projected growth rates, they still look expensive, trading at P/E-to-growth ratios of nearly 1.8 for eBay and 1.4 for Amazon.

But those pricey multiples have come at a time that earnings expectations may be getting ahead of Internet companies' ability to meet them.

Amazon, for instance, has predicted that it will post per-share earnings this year ranging from 84 cents to $1.03 on sales of between $6.45 billion and $6.81 billion. But analysts expect the online retailer to hit the high point of its range for both earnings and revenue.

For the second quarter, the Street predicts that Amazon will post profits of 19 cents a share -- excluding charges -- on $1.43 billion in sales. In April, Amazon forecast that it would earn approximately 15 cents to 20 cents a share on $1.34 billion to $1.44 billion in sales.