How to love Amazon and still hate its stock

April 28, 2011, 10:53 PM UTC

FORTUNE — Ah, Wall Street. You’re always surprising us, aren’t you? When reported earnings on Monday, you did the opposite of what we might expect. The online retailer’s profits were down — below expectations, even — and yet you decided that the appropriate response was to bid up the stock, which rose from $181 to $195 as a result. While I am well aware that the expectations game is fraught with complication, can we not just agree that a stock should go down when the company disappoints, and up when it surprises? What the hell, people?

Jeff Bezos, big spender.

Of course, that was a gross simplification. Amazon, the clear king of online retail, did have a lot of good news to report. Like the fact that the company’s North American sales rose 45% in the quarter versus last year. Total sales grew an almost-as-impressive 38%, to $9.9 billion. You’ve got to give it to these guys — Amazon is an unmitigated retail success story.

There are lots of other positives as well. They have a pristine balance sheet. They have a patient investor base that’s letting them spend, spend, and spend on attracting and maintaining market share at the expense of short-term profits. That’s largely because they have demonstrated an ability to turn those investments into market share gains. The last time Amazon (AMZN) decided to ramp up R&D, they came up with the Kindle, cloud computing, and even parts of their current video streaming technology. Investors are clearly hoping for more of the same.

“The reason the stock went up is because people have seen this movie before,” says Citigroup analyst Mark Mahaney. “If you’d bought the stock in the 2004 to 2006 investment cycle, when everyone else was selling, you would have profited immensely. These are offensive investments, not defensive ones.”

Mahaney is not alone in his bullishness. In fact, the majority of Wall Street analysts covering the stock rate it a buy. The bull case is a simple one: Amazon is taking market share in a part of the retail industry — e-commerce — that is taking market share itself, while simultaneously expanding around the globe. What’s not to like?

A stock that trades for 60 times earnings estimates, for one. By comparison, another technology company on a hot streak that you may have heard of — Apple — trades for just 14 times earnings. And Apple (AAPL) doesn’t have 3.3% net margins. More like 18%. And its sales didn’t grow at just 38% last quarter. More like 83%. Again, what the hell, people?

I’m a happy customer of Amazon. In fact, I have been a long-time Amazon Prime customer, paying $90 or so a year for two-day delivery on most of my orders. So I have no axe to grind with the company at all. I’m practically a Prime evangelist. Seriously: I love Amazon. But I have no idea why investors seem to be so enamored with it. (I also know that the more people who sign up for Amazon Prime, the lower the company’s profits go. We’re not an inexpensive group.)

Neither does Colin Gillis of BGC Partners, who happens to be the only Wall Street analyst who has a sell rating on the stock. I and asked him if Amazon was another one of those Wall Street sucker plays that somehow manages to string investors on for years by continually (and convincingly) deluding them into thinking that massive profits were just around the corner.

“There’s always some big expense — ‘Because we’re growing!’ — that once it’s done investors expect earnings will materialize,” says Gillis. “That’s the bull case. But I’m amazed that people aren’t more focused on the fact that a huge piece of their business is being disrupted. Their sales of media — books, music, and movies — grew only 15% in the quarter. And the quarter before that it was only 12%. That’s not a growth business.”

Who is the leader in digital movies, Gillis asks? Netflix (NFLX) is the answer. Who is the leader in digital music? Apple. And while Amazon still has books, the economics of that business are being shredded by the transition to a digital world. The Kindle has an impressive market share, but giving away expensive hardware for almost nothing in order to make a few bucks a book hardly seems to surest route to financial nirvana. (Again, it’s all just around the corner…)

All that said, Amazon is still the undisputed king of online retail. Have you ever even been to’s (WMT) website? I mean, come on guys, get in the game already. It’s like visiting your grandmother.

What’s Amazon got going for it? Market share, investor patience, smart management, a solid balance sheet. What’s it got going against it? The fact that at the end of the day, it is a discount retailer, and nothing more, no matter how much hubbub they can generate about their cloud computing services or loss-leader products like Kindle. The future economics of digital media are unclear and probably declining. What’s more, transportation costs — which Amazon effectively subsidizes for its customers (in particular its Prime customers) — are going through the roof. CEO Jeff Bezos opined in the company’s just-released annual report that he thinks everybody is on the same page. “We have unshakeable conviction that the long-term interests of shareowners are perfectly aligned with the interests of customers,” he wrote. I’m willing to go part ways there with him — growing market share with happy customers is better than its opposite — but not the whole way. Amazon, which didn’t return a call by press time, is spending its way to gigantism by subsidizing customers like me at the expense of those same shareholders. I’ve seen perfect alignment before, people, and that ain’t it.

Think about it another way. Everyone always talked about the operating leverage that Wal-Mart was poised to deliver, once it “consolidated” its market-leading position in selling cheap crap to lower-income Americans. They consolidated, of course, but the leverage never appeared. I’m sure Bezos would be happy to go down in history as the Internet era Sam Walton. The only question is whether shareholders are dreaming of a little more.

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