Devitt's nonchalant attitude toward the questionable short-term return on Amazon.com's Web services business represents Wall Street's confidence in the company. Revenue has grown year over year, and even though net income declined from 2004 to 2006 due to increases in income tax expenses, the stock averages an outperform rating, which means analysts expect shares of Amazon.com to outperform the broader market averages. Indeed, the average target price for the stock, which was trading around $91 when this story was reported, is US$100 a share-just US$13 under the all-time high the stock hit at the height of the Internet boom in 1999. Investors' confidence in Amazon.com today is founded on the company's ability to execute its strategy and understanding of what works on the Internet, and not some irrational exuberance over a New Economy business plan, as was once the case.

"The company has executed on its strategy as planned when it was just a books, music and DVD website," says Devitt.

"Investors are very excited about this company because it has rebuilt its growth and improved its margins," says Sanford C. Bernstein's Lindsay.

Cash + willingness to experiment + stable leadership = Success

Lindsay says Amazon.com has been able to execute on so many different ideas because it generates a lot of cash and because the founder, Jeff Bezos, remains at the helm as CEO. "He's a visionary and very single minded. If he wants to do something, he can get it done," says Lindsay.

When Bezos has an idea he wants to act on, no matter how controversial, whether it's a free shipping service or welcoming third-party sellers whose prices are cheaper than Amazon's, his customer service instincts often prove to be right. Amazon Prime, the free shipping service Amazon.com offers to customers who pay an annual US$79 fee, is a case in point. Skeptics thought offering such a deep discount on shipping to so many customers would hurt the company's bottom line. In fact, it bolstered it. Amazon Prime has tied customers to the company in a way that few other loyalty programs have, says customer service author and expert Patricia Seybold. Whenever an Amazon Prime subscriber needs to purchase something on the Web, he looks to Amazon.com first because he doesn't have to pay shipping. Amazon Prime has successfully changed consumers' shopping behavior, says Seybold. And now that Amazon.com offers so many more products, customers have even more reason to subscribe to Prime and shop with Amazon.

Of course, not every idea has stuck to the bull's-eye. Devitt and Forrester's Johnson say that Amazon Enterprise Solutions, Amazon.com's e-commerce services business for retailers, has not been very successful. "Large retailers decided that Amazon was a competitor and moved away. Others looking for solutions went with GSI Commerce," says Devitt, referring to an e-commerce outsourcing vendor. In fact, one of Amazon.com's earliest customers, Borders, announced last April that it would be launching its own proprietary e-commerce site and thus parting ways with Amazon.com. Johnson says Amazon.com is no longer aggressively pursuing large deals in this space, though last July it debuted a new website for apparel designer Lacoste.

The venture funding the company received in its early days has also enabled Amazon to be a first-mover and take risks that other companies wouldn't dare consider, according to Devitt.

"This company would not be as successful as it is today if it had not been appropriately funded at a time when capital was so cheap," says Devitt. "The funding gave them the capacity to scale. Since that point in time it's been a very deep understanding of what works on the Internet."

Sanford C. Bernstein's Lindsay notes Amazon.com's ability to recognize and capitalize on product categories such as nonperishable groceries, beauty products and jewelry that are poised for growth online. "They're getting into categories people find strange like auto parts, jewelry, apparel and watches. These are mature, slow-growing sectors in the offline world, but online they're growing rapidly. It's this online switching effect that Amazon has identified and that is driving a lot of growth for the company."