After a climb of more than 85% this year, has Amazon.com's ( AMZN) stock reached a peak?

That's what some investors and analysts are starting to wonder after a downgrade of Amazon shares by Legg Mason's Thomas Underwood on Tuesday. Citing valuation concerns, Underwood dropped his recommendation on Amazon from a hold to a sell.

"Despite Amazon's signficant outperformance vs. expectations and despite the company's significant fundamental advantages over traditional retailers, we would not own shares at current levels," Underwood wrote in his report. (Legg Mason does not have investment banking business with Amazon.)

Following his report, Amazon shares fell, ending regular trading down 17 cents, or 0.5%, to $35.23. Shares in the e-commerce company are up from the end of last year, when they traded at $18.89. The company's stock has climbed steadily since reaching a nadir of less than $13 a share last summer.

Some analysts were questioning the company's valuation throughout that rise, including Prudential Securities analyst Mark Rowen, who in December reiterated an earlier sell rating on the company's stock and his $10 price target on it.

By just about any measure, Amazon is a pricey stock. The company's shares are currently trading at 72.6 times analysts' projected 2003 earnings. That number would be a whole lot bigger if it were based on GAAP figures, which include a whole host of charges that analysts exclude from their estimates.

Even so, Amazon is pricier on a P/E basis than e-commerce rival eBay ( EBAY), which is currently trading at about 66.9 times current year earnings. This despite the fact that eBay has been consistently profitable, has little debt and has posted far faster revenue growth rates than Amazon.

In Amazon's case, some of its stock appreciation could be explained by improving fundamentals. The company posted its second-ever quarterly profit on a GAAP basis in the fourth quarter. Meanwhile, the company bested analysts' expectations in the first quarter by about 6 cents a share.

But the company still faces plenty of questions. Despite beating first-quarter expectations, for example, Amazon saw its free cash flow decline by nearly $260 million in the quarter and part of its upside came from the benefit of a declining dollar on the nominal value of its overseas sales. Meanwhile, it still carries more than $2 billion debt and has seen sales of its core media products slow.

Amazon's international business is driving the company's overall revenue growth, noted one fund manager, who asked not to be named. But that business is running several years behind Amazon's U.S. business in terms of maturity. Once the international business starts to mature, its growth rate -- and Amazon's as a whole -- will slow further, the fund manager said. What will the company be worth if its revenue growth rate slows to 15% next year?, the fund manager wondered.

But that's a longer-term problem. In the shorter term, the company's stock could be rocked if its second- or third-quarter earnings miss expectations, the fund manager warned.

"The stock could go to $20 if they do," the fund manager said.

But when it comes to Amazon in particular and Internet stocks in general, the market has largely ignored all concerns in recent months. eBay, Amazon and Yahoo! ( YHOO) all hit their 52-week highs last week, with eBay topping $103 a share. Meanwhile, TheStreet.com Internet Index has risen 34.2% in the year to date.

"All the bear stories on fundamentals have not proven out," noted Gary Farber, a partner with hedge fund Nightingale & Farber. (Nightingale & Farber does not have a position in Amazon.)

Some are wondering, though, if that's about to change.

In the last several sessions, the three big Internet stocks -- Yahoo!, Amazon and eBay -- have been trading down even while the broader market has been trading up, said the fund manager. In late trading on Tuesday, for instance, all three were trading down, even while both the Dow Jones Industrial Average and the Nasdaq were trading up. That may be an indication that investors are taking their gains and shifting money to other sectors, said the fund manager.

"Maybe these stocks need a breather," the fund manager said. "Maybe they've hit a relative peak."

Underwood stuck to the valuation theme in his report, noting that Amazon's shares are trading at 49 times his projected 2004 earnings.

"We believe that current investor optimism regarding Amazon fully captures potential returns over the next 12 months," he wrote.

But Internet stocks can be difficult to value, Underwood said, pointing to the volatility in the stock prices of Amazon, eBay and Yahoo!. Underwood noted that Legg Mason missed out on Amazon's bull run over the past several months by having a hold rating on the stock.

"We've missed an opportunity by not recommending purchase of Amazon this year, and we may now be wrong in recommending share sales," he wrote.

Indeed, making a fuss about valuation now seems a bit late, said Farber. On a P/E basis, the company's stock could have been considered overvalued when it was in the $20s. The key question is whether market sentiment has shifted on Amazon and the other Internet players, he said.

"It's too early to tell if they are rolling over," Farber said. "At a minimum, it looks like they are consolidating."