Two months after Amazon.com Inc. posted first-quarter results that gave a boost to bulls anxious for a sign of improved earnings and profit margins, the online retailer's valuation is soaring -- and perplexing many.

Trading at 53 times expected 2008 earnings, Amazon's valuation is more double that of Google Inc. and eBay, and nearly twice that of Apple Inc.

Amazon's rich valuation, which has historically ranged higher than most tech companies and well above brick-and-mortar rivals like Wal-Mart Stores Inc., is due to a confluence of factors involving a limited concentration of holdings, a period of intense investment, and an indefatigable faith in the company's future among some core investors, Wall Street says.

The company posted net earnings in late April that nearly doubled, helped in large part by a lower tax rate, and raised its 2007 sales and operating income estimates. But the share price, up 58 percent since earnings were announced, has grown faster than earnings expectations, boosted Amazon's price-to-earnings ratio to a dizzying level.

A unique psychology is at work when it comes to Amazon, argues Global Crown Capital's Martin Pyykkonen, who describes some of the company's bulls as having gone off their rocker.

It's the psychology behind it, he said of investors' reaction. It's more a case of the news (in the first quarter) didn't get any worse and in some cases it got better.

Jordan Rohan of RBC Capital Markets said, I struggle with the valuation, too. Many people have questions.

Pyykkonen, calling himself a perennial bear in terms of (Amazon's) valuation, said bulls might be betting on a more substantial and sustained scale-back in investment spending than he is.

Amazon has just begun to decelerate spending on technology and content that has depressed earnings over the past few years in an investment spree that frustrated many on Wall Street.

But given the competitive nature of the retail business, Pyykkonen does not see Amazon sitting on the sidelines as rivals gain traction. Instead, he said, spending at Amazon will be a given over the long haul: To stay competitive, you have to invest. It's the way it is.

FEW OWNERS, MORE VOLATILITY

Another issue with Amazon's valuation may be that many shareholders have substantial stakes, limiting the number of shares that are freely available to be bought and sold.

Chief Executive Jeffrey Bezos' has nearly 25 percent of Amazon's shares. Its top five institutional investors also hold significant stakes. For example, Amazon's largest institutional investor, Legg Mason, controls 20 percent of the stock.

So the free float that is left is relatively small, RBC's Rohan explained, and even slight shifts in the company's fundamentals can spark a disproportionate move.

Amazon shares are destined to be wild and volatile, Rohan said.

Short sellers also contributed to the initial run on Amazon shares after earnings were released. The shorts, betting against Amazon, rushed to buy stock to limit their losses when shares began to rise, pushing the stock price even higher.

Robert Toomey of E.K. Riley sees Amazon's high multiple as a sign of the retailer's recent investment cycle, and says the phenomenon is seen whenever earnings are temporarily depressed, whether from recession or investment.

Amazon's valuation by price to trailing 12-month earnings before interest, depreciation, tax and amortization, or EBIDTA, also topped other Internet companies, Toomey said.

They do look relatively expensive relative to Google and Apple right now, he said. But again, they've been spending very heavily and that has depressed their cash flow. As their cash flow improves, the valuation is not that extreme.

Investors are betting that the improved profit margins seen in the first quarter will continue, while revenues will be buoyed by much-hyped, newly introduced digital services such as video and music, which pits Amazon against Apple's successful iTunes service.

Amazon executives, Pyykkonen argued, are probably equally dumbfounded by their share price rise and wondering: What did we say that made people feel that good?

Comparing Amazon with Google, Pyykkonen said the two companies' price-to-earnings ratios -- with Amazon using GAAP numbers and Google adjusted -- have over the last two years been comparable. That has now shifted.

When I look at both companies, the advertising market, the margins, the competitive position ... that should be worth a whole lot more multiple than an online retailer that's in a brutally competitive business, Pyykkonen said. I would argue (Amazon) should be worth less than Google.

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