Receive free updates on the Technology sector
Sign up now to receive a daily email summarizing the latest news in the Technology sector. This article is an on-site version of our Unhedged newsletter. Be sure to subscribe to receive the newsletter directly in your inbox every weekday.
Yesterday morning at 10:30 AM, I thought I had written a perfectly timed column. I had warned in the morning’s letter about the rising bond yields and their impact on stock prices. As yields continued to increase, stocks appeared to be on the verge of a significant decline. However, stocks ultimately rose and closed nearly unchanged. Perhaps my moment of prescience will come next week. Email me at [email protected].
Let’s talk about Amazon vs Apple. Take a look at the relative performance of these two stocks since the beginning of 2015. From 2015-2018, Amazon significantly outperformed Apple, with a brief period of underperformance in between. However, since 2019, the tables have turned. Over the entire timeframe, both stocks have been great investments, with Amazon’s annual return at 28% and Apple’s at 27%.
This raises the question: which stock would you prefer to own at the current price for the next few years? Of course, this question is purely academic. Real investing is not about choosing between two options. Investors can own both, neither, or a combination of the two, depending on their portfolio. However, this question is interesting because these two businesses are very different and valued differently, despite being part of the “magnificent seven” big tech club. Your preference between the two stocks will reflect your thoughts on the future of technology, as well as your approach to stocks and investing.
Let’s start with a basic description of the contrast between the two companies. Amazon is a two-part infrastructure business, with a dominant online consumer retail operation and a leading cloud computing operation for businesses. It has experienced rapid revenue growth of over 20% per year for the past decade. The business as a whole requires significant capital investment and operates with low margins. Amazon reinvests most of its cash flow internally and does not pay dividends. On the other hand, Apple is a high-margin business that sells high-end devices and services to consumers. It generates substantial free cash flow, which it mostly deploys for dividends and share buybacks.
The choice between the two stocks will divide investors based on their approach or bias. Growth investors will likely favor Amazon, while value investors will lean towards Apple. As someone with a bias towards value investing, I strongly prefer Apple in this case (although I find Amazon more interesting when comparing the two companies overall).
The second-quarter results for both companies, released yesterday, fit into this basic characterization. Amazon saw an 11% increase in revenue compared to the previous year, while Apple’s revenue remained flat. Apple’s earnings per share grew mainly due to share buybacks. However, looking beyond just one quarter, the clear value/growth divide becomes blurred. Apple’s valuation has risen as investors flock to big tech stocks. The stock, which previously traded under 20 times earnings, now trades at over 30 times. On the other hand, Amazon’s growth has slowed. Wall Street estimates for both companies indicate that the old growth differential between the two will reestablish itself in the coming years.
While the future growth of online retail and cloud computing industries is uncertain, one thing is evident: the growth in Amazon’s core businesses has slowed, yet the stock is priced as if that slowdown will cease. Apple, on the other hand, has slightly lower growth expectations, and I find that appealing.
This brings me to the second part of the case for Apple over Amazon: the financial environment may become less favorable for long-term growth bets. With higher inflation, interest rates, and tighter liquidity, investor risk appetites may diminish, making Apple’s substantial cash flow more attractive than Amazon’s promise of global dominance. It’s possible that Amazon’s leadership may recognize this shift and prioritize present profitability over future investment, but that process would likely be bumpy and require a significant change in the company’s shareholder base.
In summary, I expect Apple’s outperformance over the past few years to continue in the coming years. Is this purely influenced by my value bias? It’s possible. If any readers would like to make a case for Amazon and growth, I invite you to do so.
One good read:
Check out the FT Unhedged podcast to stay up-to-date with the latest market news and financial headlines. Hosted by Ethan Wu and Katie Martin, each episode offers a 15-minute dive into the market’s happenings.
Make sure to catch up on past editions of our newsletter!
We also recommend subscribing to:
– Swamp Notes: Expert insights on the intersection of money and power in US politics.
– The Lex Newsletter: Our incisive daily column on investment, covering local and global trends from expert writers in financial centers.
Denial of responsibility! VigourTimes is an automatic aggregator of Global media. In each content, the hyperlink to the primary source is specified. All trademarks belong to their rightful owners, and all materials to their authors. For any complaint, please reach us at – [email protected]. We will take necessary action within 24 hours.
