Daily Ticker

Here’s Why Amazon’s Stock Is Soaring While Apple’s Is Cratering

Daily Ticker

There has been much frustration and outrage among two groups of investors in recent days--Apple bulls and Amazon (AMZN) bears.

Apple (AAPL) reported a quarter that beat Wall Street's printed expectations--and the stock tanked.

Related:Apple Succumbs to the $500B Market Cap Curse

Amazon reported a quarter that mostly missed Wall Street's printed expectations--and the stock soared.

Meanwhile, Apple's stock is trading at low multiple of 10-times earnings, and Amazon's stock is trading at an "infinite" price-earnings ratio.

So what gives?

Have investors gone insane?

Only the future will tell us for sure whether the prices investors are currently paying for Apple and Amazon (and every other stock) are reasonable. And, unfortunately, no one yet knows what the future holds.

But!

We can at least review the stories that some sophisticated investors are telling themselves as they sell Apple and buy Amazon.

The bearish Apple story is this:

  • The company is already so huge that the days of rapid revenue growth are likely over.
  • The explosive growth in the smartphone business--Apple's most profitable product--have now moved to market segments and geographies where Apple doesn't play (cheap phones for emerging markets)
  • Apple's competitors have caught up--the iPhone is no longer clearly the best phone on the market
  • Apple's profit margin is very high and declining rapidly as lower-margin products become a bigger percentage of its revenue
  • "Gadgets" are a mind-bogglingly competitive business in which each new product can leapfrog the prior generation and make existing products obsolete
  • Apple's results were worse than Wall Street's "whisper" expectations--which are often quite different than the analysts' printed expectations (Sorry--this is just the reality. The investors who actually buy and sell stocks don't publish their estimates. Brokerage analysts who publish estimates, meanwhile, don't actually buy and sell stocks.)

Bottom line, with Apple, investors see decelerating revenue growth, declining profit margins, and increasing competition and market saturation--all of which are worse than expected.

The good news on Apple--and it is very good news--is that the stock now appears to be cheap.

Related: Apple Analyst Thinks The Stock Is A Steal At This Price

The bullish Amazon story, meanwhile, is this:

  • Amazon is the global leader in a massive market, ecommerce, and it has become so synonymous with "online shopping" that many consumers now just start their searches at Amazon.com
  • eCommerce has a huge barrier to entry: The distribution systems, scale, and technology that Amazon has built over the last 15 years make it hard for anyone else to sustainably offer comparable prices and service
  • Amazon's revenue growth is very rapid for a company of this size (although it has begun to decelerate)
  • Amazon has made massive investments in the past few years in fulfillment, the Kindle (and, probably, smartphones), and Amazon Web Services. These investments have depressed Amazon's earnings--and they are about to start paying off
  • Amazon's results were better than Wall Street's expectations in one key way--profit margin.
  • Amazon's profit margin is low and increasing

This last point is the critical one:

Some sophisticated investors believe that Amazon's profit margin will increase rapidly over the next couple of years. This, in turn, is expected to drive earnings growth that is far faster than revenue growth.

Specifically, Amazon's earnings per share are expected to skyrocket from basically $0.00 in 2012 to about $5.00 in 2014. And that expected profit growth, which is expected to be driven by Amazon's expanding profit margin, has investors jazzed.

Now, that said, even if Amazon earns $5 a share in 2014, the stock is still very expensive--nearly 60 times projected earnings.

And Amazon's revenue growth is now decelerating, which investors normally hate.

So, even though Amazon's profit margin is expected to expand rapidly over the next few years, I am surprised at the price that investors are willing to pay for Amazon.

And I say that as an Amazon shareholder.

(I've owned Amazon for the last 15 years--the first 10 of which were miserable. I'm an Apple shareholder, too, albeit indirectly. Apple is a healthy percentage of the index funds that I now swear by. With the exception of a handful of legacy positions from the 1990s--Amazon, for example--I don't own or trade individual stocks anymore.)

The bottom line is that what many sophisticated investors look at is the direction of change. When things are getting better--when revenue growth is accelerating and margins are increasing--investors are often willing to ignore high valuations. When things are getting worse, meanwhile--when revenue growth is decelerating and margins are declining--even low valuations sometimes aren't enough to induce investors to buy.

And the perception right now on Wall Street is that things are getting worse at Apple and better at Amazon.

SEE ALSO: After A 35% Crash, Apple's Stock Looks Cheap

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