Can Amazon's Stock Surge Last?

For a company at the mercy of penny-pinching customers, Amazon is looking pretty good. In the past four months the stock has more than doubled, to 71.25 on Mar. 18 from a two-year low of 35.03 in mid-November, when investors sold the shares on concern yearend sales would slump.

Amazon (AMZN) shares are gaining as investors pursue the small number of companies they believe will withstand the current slump. The stock is also being propelled by hype over recent Amazon products. The speed of the rally, however, has some analysts concerned it may not last.

Many investors are looking for companies that continue to innovate while cranking out a solid performance despite the recession. Like Wal-Mart (WMT), Amazon is seen as a brand consumers believe provides good value. That's helping Amazon grab market share and new customers even in the downturn, and positions the company to emerge even more strongly from the recession, analysts say. "Investors are paying a premium for companies that are beneficiaries of the current environment and also for management teams they can trust with high-quality earnings," says Scott Devitt, an analyst at Stifel Nicolaus (SF).

Few Promising E-Commerce Players

The hubbub about the Kindle e-reader is also pushing the stock higher, analysts say. The innovative device promises to create a new market for digital books, an opportunity the company is promoting by having CEO and founder Jeffrey Bezos barnstorm talk shows, ranging from the Today show to The Daily Show with Jon Stewart.

As attractive as Amazon's management and product mix may be, some investors are rushing to purchase the shares because there is a dearth of alternatives. Amazon did prove its mettle by posting strong holiday results despite the dramatic falloff in traditional and online retail sales. Institutional investors also are snapping up Amazon stock because they need somewhere to park money, says Youseff Squali, an analyst at Jeffries & Co. "If you're a portfolio manager and you want e-commerce exposure, which many do, there aren't that many promising players," he says. Competing e-commerce players, including eBay (EBAY) and Blue Nile (NILE), haven't performed as well. Among the few online retailers holding their own are Netflix (NFLX) and Amazon, Squali says.

Proving Its Long-Term Value

In large measure, the stock rebound is a vindication of Amazon's risky and often maligned strategy in recent years of expanding into new product areas and pouring money into new technology aimed at fulfilling orders more efficiently and crunching data on user buying and browsing habits. The outlays took a toll on margins in recent quarters and rankled some analysts and shareholders, says Jeffrey Lindsay, an analyst at Bernstein Research. But those investments paved the way for Amazon to offer the lower prices, broader product range, and convenient shopping experience that's now wooing thrifty consumers.

Devitt of Stifel Nicolaus says Amazon's success during the recession is proof of its long-term value. He believes a fundamental reassessment of the value of companies is happening because of the downturn. Companies like Amazon are showing that by focusing obsessively on customers—as Amazon did, for instance, by taking a bet on cheap two-day shipping—it has created sustainable value. "Amazon is a low-cost operator that has a passion for its customer," Devitt says. "This shows that Amazon is willing to make as little profit as possible on each transaction to build loyalty and trust. Companies like Amazon deserve premiums because they will be around in 50 years when most of its competitors of today will not."

Despite the renewed faith in the company's brand, the stock may not be able to keep rising at its current pace. Lindsay, for one, says Amazon shares may even lose ground. It's not that Amazon isn't defying the odds. The company just may not be performing as well as some analysts hope, says Lindsay, who expects Amazon to post revenue growth of 15% in the first quarter. Bullish analysts are counting on growth of 30%.

In a year when global e-commerce is expected to grow only 9.6%, that target may be hard to achieve—even for a company as well positioned as Amazon.

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