The explanation can only be that investors expect Amazon to continue to grow revenue and profits at a high rate. How reasonable is this expectation?
I've always thought that the intense competition in the on-line retail world would eventually result in lower profit margin for everyone including Amazon, but I hesitate to bet against such a well run firm.
That being said, Amazon is the runaway freight train in online retailing. With sales of $24.5 billion, there isn't anyone else even remotely close. Staples is no.2 at $9.5 billion and Walmart is an order of magnitude smaller than Amazon.
Amazon are on a tear this quarter with net sales growing 40%.
Now you add in their position as a leader in cloud-computing, along with the kindle.. and I think their future prospects are great.
* Woot (leading deal of the day site)
* Stanza (leading e-reader)
* Zappos (leading shoe retailer)
* dpreview.com (leading camera review site)
* AbeBooks (leading used book marketplace)
* Audible (leading audio book seller)
* BuyVIP (group purchasing)
* Amie Street (online music)
There model seems to be to try to compete with a home-grown offering, and if it doesn't work, buy the competitor with their cash.
Economies of scale create a cheaper alternate solution. That was accomplished in physical goods years ago and the cost of "transporting" physical goods is much higher than the cost of "transporting" massive data processing power.
It's easy enough to produce compute units at a lower cost than amazon. I'm doing so even now... and you can bet your bottom dollar than amazon is going to lower their prices more slowly than costs fall.
But that's why amazon is in such a strong position right now. They are basically positioned to become "the oracle of cloud computing" - Who cares if it's slightly more expensive... if you are a middle manager in a large corporation, paying another 50% or even a few hundred percent more is no big deal if it greatly decreases the chance of a big meltdown. And more to the point, if it protects you from blame when there is a meltdown.
edit:
This is what I hope will happen, anyhow, because if amazon wanted to scrap with me down at the bottom, you are right about those economies of scale. they could crush me like a bug.
But I don't think they will. I think they prefer to just take their efficiencies as profit, and target the larger customers who are willing to pay extra for the comfort of a big name