Amazon Facing Crosscurrents

Amazon.com (AMZN Quote) is bragging that this was its best holiday season ever, but you'd never know by taking a look down Wall Street.

Amazon says it shipped more than 108 million items during the holiday season. There are signs everywhere that online shopping is soaring in popularity, as users increasingly embrace the Internet as an alternative to the mall.

Yet only three of the 23 analysts covering the Seattle-based company rate its stock a buy, according to data from Bloomberg. Analysts agree the stock seems overvalued, given its run-up following its addition in November to the S&P 500. Amazon is up 10% since then and nearly 20% above its low following a late-October earnings disappointment. Amazon rose 42 cents Thursday to $47.67.

On the one hand, Amazon is clearly in position to benefit from the rise of online shopping. But increased competition and razor-thin margins are scaring investors who are otherwise enthusiastic about Internet stocks. Profits also are being hurt as Amazon boosts spending on new products and services such as Amazon Prime, which offers free two-day shipping to customers who pay $79 a year for the privilege.

"I think management is doing the right thing for the company but probably not doing the right thing in terms of short-term investment performance," says Tim Ghriskey, chief investment officer of Solaris Asset Management in Bedford Hills, N.Y., which owns Amazon shares among its $800 million in assets under management. "Wall Street prefers a bird in hand and they aren't getting it here."

Some investors are turned off by Amazon's profit margin of about 6% of sales. That pales in comparison to other Internet companies such as Google (GOOG Quote) and Yahoo! (YHOO Quote) and puts Amazon more in line with the decidedly unsexy big retailers. Meanwhile, Amazon is facing rising competition from that very corner, with Wal-Mart (WMT Quote) leading the way.