* Full Disclosure:  I own the AMZN Jan 2008 70 puts

Despite a forecast for declining margins in the 4th quarter, Amazon.com (AMZN) finished at $88.73 yesterday, down just 2.8% below the $91.28 price the stock had been at when the market opened the previous day (before surging nearly 10% that day on euphoric earnings expectations).  Further, according to MarketWatch.com, 12 of the 22 analysts that cover the stock actually increased their target price on AMZN by an average of 12% after the earnings release.  This is a stunning outcome.

Amazon has surged more than 120% since April due almost entirely to an improving profit margin story.  Analysts have chased the stock upward with ever-increasing price targets as CEO, Jeff Bezos, delivered on Wall Street’s request for decreased technology investment spending.  Rapidly expanding margins have served as the catalyst behind the stock’s sky high forward PE of nearly 60x.  That’s a PEG Ratio (PE to Growth) of 2.5x, compared with Google’s (GOOG) PEG of just under under 1x, Apple’s (AAPL) of 1.3x and eBay’s (EBAY)of 1.2x.  SEE ANALYSIS BELOW.

Another sign of possible trouble ahead for Amazon - seemingly overlooked by Wall Street - was a downbeat forecast from UPS for holiday sales released yesterday.  UPS cautioned that this year’s surge in peak-season deliveries is likely to be the weakest since 2003.

Two other reasons to be cautious about Amazon: (1) analysts are overly bullish on the prospects for the third-party sellers program that has helped Amazon grow revenue and expand margins.  It won’t be long before Amazon has to cut back on this program due to a rise in customer complaints related to less-than-Amazon-level quality service (e.g. inventory availability issues, etc); (2) it won’t be long before Amazon needs to begin investing in technology again to keep pace with its competitors (Wal-Mart.com, Target.com, etc) and customer expectations for top web companies in general.