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TheStreet Open House

Can Amazon Keep Defying Gravity?

Stocks in this article: AMZN AAPL GOOG WMT MSFT

NEW YORK ( TheStreet) -- When looking at tech and retail giant Amazon.com (AMZN - Get Report), several things come to mind.

Not only is it without question one of the best companies of this era, but in Jeff Bezos it has one of the top three visionary CEOs in the entire market. But the stock is expensive by many standards.

With a price-to-earnings ratio of more than 300, investors are betting that the company can execute to perfection. After all, anything less can't support what its valuation presumes.

On one hand, there aren't many companies the size of Amazon that is producing the level of growth it has demonstrated.

But as well as it might be performing today in the face of increased competition from Apple (AAPL), Google (GOOG) and, on the retail side, Wal-Mart Stores (WMT), I think it is prudent for investors to wonder whether Amazon can defy gravity forever.

In other words, can it grow into its valuation -- metrics that include expectations imposed by the Street regardless of how outrageous they may be?

For example, in its most recent quarter, the company reported 1 cent per share on revenue of $12.83 billion, in line with analysts' expectations.

However, while revenue soared by almost 30%, earnings per share fell dramatically by 97% year over year. What's more, over the past five quarters, the company has logged an average of 38.5% revenue growth while net income has dropped by an average of 54% annually during that same span.

In spite of this trend, not only has the stock been up as much as 52% this year but, more impressively, it has surged more than 180% over the past three years. Most stocks would have gotten punished for bottom-line trends of this sort. As much as Wall Street seems to love to complain about valuation, in this case Amazon seems to get a free pass. Why? How long will revenue growth be enough absent meaningful EPS results?

Is Reality Kicking In?

That analysts have started to pare Amazon's third-quarter estimates should be a welcome sign that perhaps the company can't defy gravity forever. Current earnings per share estimates (on average) are now at 12 cents vs. the previously anticipated mark of 24 cents. What's more, over the past three months, the company's average estimate of $1.36 per share for the current fiscal year has now been trimmed to $1.21.

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