Is Amazonâ€™s fairy-retail story coming to an end?

Is a 20-year honeymoon coming to an end? When it comes to suspending disbelief about a lack of profits — the only thing that ultimately matters when it comes to stock valuation — Amazon.com has been in a class of its own.

Its price-to-earnings ratio, a common measure of stock valuation, has at various times topped 3,000 (the market average is 18) — and that's when it actually has had a profit. Investors never seemed to care. "Over the long history of the last eight years, this stock went from $60 to $400, which made all the doubters look stupid while all the believers got rich," said Bruce Greenwald, head of the value investing programme at Columbia Business School.

"The fact that Amazon did this in the face of deteriorating operating performance — slower growth in sales and the evaporation in profit margins — has made fools of the people who looked at the reality of its operations." That may be changing. Recently, Amazon reported that revenue grew a healthy 23% in the first quarter, topping analysts' forecasts and warming hearts of Amazon loyalists. Revenue gains have always been enough to drive Amazon's stock price higher, and it rose in after-hours trading. But then, on Friday, investors seemed to focus on the one thing they've always ignored: Profits.

Sell attack
Although Amazon reported revenue of nearly $20 billion, it said its operating income fell 19%, to $146 million. Net income was a modest $108 million. Perhaps more unnerving was the company's forecast for next quarter: flat revenue and a loss that might be as big as $455 million. Shares plunged, dropping nearly 10%, or more than $30, to just over $300, at Friday's close. They hit a record high of $408 earlier this year.

This is the second quarter in a row that Amazon's results have set off selling. Amazon shares plunged 11% January 31, after fourth-quarter revenue and profits were lower than analysts' forecasts. But this time, revenue beat forecasts, suggesting that minimal profit is worrying investors. Other technology stocks have also soared to what some investors have deemed absurd valuations. The noted hedge fund manager David Einhorn warned, "We are witnessing our second tech bubble in 15 years."

The market has been roiled in recent weeks by sell-offs in high-flying technology companies, including Netflix, Tesla and Twitter. But they are still relatively young companies that are trading on expectations that have yet to be tempered by reality, and none of them was as hard hit as Amazon. Even after the plunge, Amazon's shares remain expensive by most measures. Its price-to-earnings ratio was still over 500.

Amazon's lofty valuation has long baffled many investors and analysts. But one thing they can agree on: Betting against Amazon has invariably turned out to be a mistake over the long term. (The stock has tripled over the past five years.) A dozen Wall Street analysts lowered their ratings on Amazon on Friday, but until last week, they were overwhelmingly positive about the company, with 35 of 44 analysts rating the stock a strong buy or buy.

Until last week, downgrading Amazon hasn't been a path to popularity. Stock prices are a reflection of investors' predictions of future profits, which is why there's always an element of gazing into a crystal ball. The future earnings of mature companies with long track records can be forecast with considerable accuracy, but for newcomers, especially in untested technologies, it's mostly sophisticated guesswork.

Look long term
Amazon isn't a newcomer, but it has long had a powerful story driving expectations: The notion that it will become the global Walmart of internet retailing. Anyone lucky enough to have invested $1,000 in shares at the time of Walmart's 1970 initial public offering and have held them is now worth many millions. Still, should the Walmart analogy cool, Amazon always seems to have another story.

Last week, it unveiled a deal to stream some HBO programmes over the internet, and it has been commissioning original programming. For some investors, Amazon is now the new Netflix. Or there's the cloud story, in which Amazon's cloud computing services makes it the new Salesforce.com. But perhaps Amazon is now spinning too many stories for investors to digest. Last week, it also talked about getting into package delivery, a low-margin, high-cost business dominated by United Parcel Service and FedEx. And it even mentioned developing smartphones, an intensely competitive field that has proved daunting for Google and Microsoft.

Still, if history is any guide, last week's drop in Amazon based on one quarter's results may just be another buying opportunity, and not a reversal of a 20-year trend. Mark Mahaney, an internet analyst at RBC Capital markets, reiterated his outperform rating after the earnings were released, though he dropped his price target to $400. He still sees it as a compelling growth story. He noted that Amazon accounted for only 2% of global retail sales, "if that," adding, "So there's a belief that Amazon's long-term growth is likely to be more robust than Google's, because it has lower market penetration."

Mahaney said investors trusted Amazon CEO Jeffrey Bezos although he's stingy about releasing information beyond that required by law, and have been impressed by his agility. Amazon "is a company that created devices when it was just a retailer and successfully went into cloud computing. People keep believing they can catch the latest trend. They've gotten a pass for that."

He said Amazon focuses on the long term. "To their credit, they've made big long-term bets that paid off and were willing to sacrifice short-term earnings," he said. "Getting the right valuation is tough, but I feel very strongly that five years from now," Amazon "will be a bigger part of global GDP than it is now."