Four years after it was the subject of a call that helped define dot-com mania, Amazon's ( AMZN) price is again a matter of debate. Henry Blodget and his $400 price target may be gone, but skepticism over the online retailer's valuation lives on.

It seems that lately the company's stock has been partying like it's 1999, climbing more than 50% just in the past three months. Although the company has reined in costs and is expected to post a profit this quarter on strong holiday sales, the question is whether Amazon deserves its rich valuation. It seems unlikely, given probable slower growth, uncertain success with high-margin inventory and its reliance on luring customers with margin-eating free shipping.

"No matter how you slice and dice the numbers, in our opinion, Amazon is overvalued," wrote Prudential Securities analyst Mark Rowen in a research note issued on Friday. "We continue to believe that the company's growth patterns will not ultimately support the current market valuation." (Prudential Securities does not have any investment banking relationships with Amazon.)

Rowen's report reiterated Prudential's sell rating on Amazon and reaffirmed a price target of $10 on Amazon shares. Following the report, the e-tailer's stock traded down 46 cents, or 2%, in early afternoon trading on the Nasdaq to $22.12. (It closed up 3 cents to 22.61). The company's stock has lost nearly $2, or 8%, since Monday, when it closed at $24.12.

Despite the selloff, Amazon shares have doubled in value since the beginning of the year. Amazon is now trading at 188 times its estimated 2002 earnings and about 94 times its projected 2003 earnings, according to First Call.

That puts Amazon in heady company. E-commerce rival eBay ( EBAY), which, unlike Amazon, has consistently posted profits and strong growth, is trading at a relative bargain of 84 times its estimated 2002 earnings. Meanwhile, Amazon's market capitalization of $8.5 billion edges that of offline rivals, such as Sears, Roebuck ( S) and J.C. Penney ( JCP), and is larger than the market value of Barnes & Noble, Circuit City, Abercrombie and Fitch and Toys "R" Us combined.

By way of comparison, Amazon posted a loss of $567 million on $3.1 billion in sales last year, while Sears earned $735 million, or $2.24 per diluted share, on $41 billion in sales in the same period.

Rowen is not alone in questioning Amazon's valuation. The company seems to have regained its "Internet multiple," said Jeff Matthews, general partner of Greenwich, Conn.-based investment firm Ram Partners, and a RealMoney Pro contributor.

To be sure, Amazon has a good story to tell. Once on many market observers' deathwatch because of its high debts and burgeoning losses, the company has come surging back. Amazon posted its first-ever net profit in the fourth quarter last year. Despite cutting its marketing, technology and administrative costs by about $50 million through the first three quarters of this year compared with the same period last year, it's been able to boost sales 25%, to $2.5 billion.

"They've definitely come a long way in terms of cutting costs," said Allyson Rodgers, who covers Amazon for Ragen MacKenzie. (Ragen MacKenzie does not have investment banking business with the e-tailer.)

Amazon is widely expected to do well this quarter. Sales tracked by the company's oft-derided "Delight-O-Meter" are up to 35 million units worldwide since Nov. 1. Between Nov. 15 and Dec. 5, unit sales were up 15% compared with last year, according to Prudential Securities.

Amazon has projected that its sales will come in between $1.325 billion and $1.425 billion this quarter, up 19% to 28% from last year. Wall Street analysts are expecting the company to post pro forma profits, which typically exclude non-cash charges, of 14 cents per share. Amazon does not release intra-quarter sales figures.

Despite all this in its favor, Amazon has a number of outstanding concerns that could pop its own stock bubble.

The company has posted only one quarter of operating profits and has yet to prove that it can operate profitably on a consistent basis. Wall Street analysts largely expect the company to be profitable next year and into the future, but it could do so at a lower growth rate and with lower profits than would justify its current stock price.

Amazon's growth rate stalled last year as the company focused on improving its bottom line. While Amazon's growth rate has since resumed -- sales in the third quarter this year were up 33% compared with flat growth in the same period last year -- they could be peaking, said Jeff Fieler, who covers Amazon for Bear Stearns.

Domestically, Amazon's sales are dominated by its books business, which is a slow-growing category overall, Fieler said. Meanwhile, Amazon's international business, which grew by 90% in the third quarter this year, is likely to slow down to fall in line with economic growth, he said.

"I think the big upside surprises could be over," he said.

Despite expanding its product lines into everything from tools and hardware to apparel to travel, Amazon is still largely known as a seller of media products, particularly books, said Tom Underwood, an analyst with Legg Mason, in a research note last month. While its books, music and video businesses are now profitable, posting an operating profit of about 10% of revenue in the third quarter, its electronics, tools and kitchen categories have been a money pit, posting operating losses of $637 million since they were launched, with no end in site, Underwood said.

" Electronics, tools and kitchen ultimately may prove to be a profitable business, but we do not believe that it will generate an acceptable return on investment for most shareholders over the next decade or longer," Underwood said.

But perhaps the biggest problem Amazon faces is with shipping costs.

Much of Amazon's growth over the last year is due to a free-shipping offer it instituted last year, said Ken Cassar, who covers e-commerce for Jupiter Research. Starting last holiday season, Amazon offered customers free shipping on most orders of $99 or more. The company has since brought the threshold for free shipping down to $25.

The promotion has proven to be costly. In the third quarter, Amazon lost $10 million on $73 million of revenue it generated on shipping charges. In the same period last year, the company lost $2 million on $74 million in shipping revenue.

Those losses could balloon this quarter, typically the biggest for most retailers. Amazon lowered its threshold for free shipping from $49 to $25 during the middle of the third quarter; the fourth quarter will be the first complete one with the threshold at the lower figure.

Amazon has not said whether it will continue the free-shipping promotion past the fourth quarter. But the company may find itself in a bind. The No. 1 impediment to online purchasing is shipping costs, Cassar said.

"It's a necessary evil. In order to maintain solid demand, online retailers have no choice but to offer free shipping," he said.

That leaves the company in a Catch-22, Fieler said. Amazon can drop or modify the free-shipping offer, but its sales growth would decline. But if it keeps it in place, losses can mount. The problem for Amazon is that the $25 threshold may prove too low a threshold, Fieler said.

"It's possible that they overshot the target," he said. "I think that's something they're assessing right now, whether they can leave that on and make it permanent."

Either way, the company's stock price could be affected.

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