For once, the

Amazon.com

(AMZN) - Get Report

bears were silent Wednesday.

Rebounding
'Inflection point' for Amazon

Amazon's shares surged more 21% Wednesday after the company Tuesday night

reported a narrower-than-expected third-quarter loss, greater-than-expected sales and a big improvement in gross margins. Woo hoo! Party! Bobby Valentine probably rallied his

Mets

by quoting Jeff Bezos. What could be wrong with that?

Ah, but this is Amazon, possibly the world's most controversial stock. When one's market cap is about ten times that of

Barnes & Noble

(BKS) - Get Report

, and one's price-to-sales ratio is about four times that of

Wal-Mart

(WMT) - Get Report

, there is

always

something to pick at.

Toys in the Attic?

So for the sake of argument -- because there will still be plenty about Amazon -- here goes: First, sales growth. The company said sales rose 79% from the same quarter a year ago, to $638 million. As

TheStreet.com

noted Tuesday, however, that figure includes $20 million in toys Amazon sold to

Toysrus.com

(at cost) for the companies' sales partnership. Subtract that out, and sales were $618 million -- still higher than the $600 million consensus, but not as spectacular.

And Mark Rowen, analyst at

TheStreet Recommends

Prudential Securities

, notes that sales growth at the company's main book, music and video segment was just 33% over the third quarter of 1999. Rowen thinks the company's book business is getting close to saturation, and that growth will eventually slow to the rate of growth in the book industry -- some 5% -- plus the rate of growth for Internet adoption -- 15%-20%, he figures. (Rowen rates Amazon shares a hold, and his firm hasn't done underwriting for the company.)

Slippery Slope
Amazon's retreat from highs

But what about all those new businesses? Didn't consumer electronics leapfrog music to become Amazon's second-biggest product segment during the quarter? Yes, it did. But Sara Farley, analyst with

PaineWebber

, isn't too impressed, since electronics have such a higher average sales price than music. (She rates Amazon shares a neutral, and her firm hasn't done underwriting for the company.)

Moreover, consumer electronics isn't the best business to be in these days.

Circuit City

(CC) - Get Report

is sucking some serious wind, and while part of its woes are due to its own remodeling and decision to phase out appliances, there's unease about the whole industry given the apparent consumer slowdown. What happens to Amazon's consumer electronics margins if the entire sector sees big discounts?

Then there's the future. Amazon estimated 2001 revenue of $4 billion. That would represent growth of less than the 50% rate that Amazon, at its September analyst day, estimated it could achieve. "Revenue guidance was modest -- it was lower than I expected," says Faye Landes, analyst with

Sanford Bernstein

, who rates the stock underperform. (Her firm doesn't do underwriting.) "The quarter looked pretty good, but I'm reserving judgment."

Gross margins? Much better than even the most bullish of bulls had anticipated, thanks to fewer split shipments, better inventory management and better terms with vendors. Farley says that isn't enough. "We didn't hear anything that's going to change our thesis on the stock," says Farley. "Operating efficiencies only get you so far, and the real benefit will come from leverage from accelerated revenue growth."

The Exposure

Finally, there's the continuing issue of the Amazon Commerce Network, the fancy name for the group of partners Amazon features on its site. Revenue coming from companies like

Pets.com

(IPET)

and

Drugstore.com

(DSCM)

is admittedly very high margin (some 98%, estimates Farley). But as bears have long pointed out, this revenue stream is subject to renegotiation as e-tailing companies suffer. And it doesn't really reflect strength in Amazon's main business -- selling stuff.

To be sure, none of this changes the fact that Amazon beat the Street's estimates. Some, like

Merrill Lynch's

Henry Blodget, think this is the inflection point that Amazon shareholders have been waiting for. There's certainly plenty of good news to hang one's hat on. (Blodget rates Amazon accumulate, and his firm hasn't done underwriting for the company.)

But remember: This was just the third quarter. The holiday sales season is just now beginning, and Amazon got 41% of its 1999 sales in the fourth quarter. That means what happens in the next few months is far more crucial to Amazon than what happened last quarter. And at these still-lofty valuations, the Amazon controversy is very far from over.