How is it that Amazon is more highly valued than Apple?
NEW YORK (TheStreet) -- Apple (:AAPL) and Amazon (:AMZN) each released earnings Thursday, and the timing helped illustrate the contrast between the two technology pioneers.
The numbers, and investors' reaction, may end there, but these two large companies share many revenue characteristics and compete in several of the same spaces. Both sell digital media for download and streaming. Both sell hardware, and both are trying to develop a "go-to" ecosystem for shopping online, albeit in different ways.
Adding Google (:GOOG) to the mix doesn't complicate matters greatly because, again, they all compete in the same industry. Day by day, the companies are merging, just as the technology is coming together.
Not to be left out, Microsoft (:MSFT) spent billions of dollars developing the XBox and Kinect, keeping Microsoft not only relevant, but influential to the market. Well, at least relevant in some parts of technology. Consumers couldn't expect Google would take over the smartphone space as quickly as it did, but seriously, Microsoft (and Reseach In Motion (:RIMM)) should have seen it coming.
The failings of Microsoft and RIM are not that important to the world, according to Amazon investors, but they do help lead us to where Amazon is headed. I have read that if Apple traded at a forward price-to-earnings multiple close to that of Amazon, it would trade for over $1,000 a share. I have written in previous articles that Apple would trade for even more.
Instead of looking at what Apple would trade at if the world tipped upside down as it has for Amazon, let's examine what Amazon may look like if it traded like other technology stocks. According to Yahoo Finance, Amazon has a trailing 12-month price-to-earnings ratio of -- gulp -- 2,836. One of the highest I have ever seen in my lifetime of trading of 30 years. Amazon also has a relatively more modest forward earnings ratio of 130.
When I think of a company that needs to perform as well as expected for the next 130 years before I double my money (actually the amount of time for the company to earn enough to pay for a share, the stock doesn't have to increase in value), I start to think of a vacation.
Not exactly a vacation per se, but the part of the vacation that begins with "Dad, are we there yet?" after driving 15 miles of a 600-mile trip, and ends with, well -- it just never seems to end. Not until long after "Are we there yet?" is permanently burned into your brain.
The same as a company with a forward earnings multiple over 100 rarely seems to "get there" before the price implodes. Of course, we can say that Amazon is spending now for a future; much like a start-up will need to spend for its build-out.
I have a little secret to share with you about Amazon and its spending. Are you ready, because this is going to be a shocker for many? Amazon is not a startup. Boom -- I said it. Amazon isn't a startup in any sense of the word except for investors who sit around year after year waiting for their payday.
Jeff Bezos has done a fantastic job (Oscar-winning performance, no doubt) of convincing investors that if they only follow the rainbow for a few more miles, they will reach a pot of gold at the end. The problem is, this isn't a startup, and there is no pot of gold. Actually, investors will find Apple, Google and Wal-Mart (:WMT) at the end.
Did you know Amazon is over 15 years old? In the past 15 years, Amazon hasn't figured out how to sell a tablet and make one dime off it. If selling the Kindle was the only downside, Amazon could easily be forgiven; however, Amazon hopes to sell products, along with the Kindle, that have shrinking margins. When a lower price is only a click away, and the only thing you're selling is a zero value-added digital product like an audio book, you are in a race to the bottom of profitability, my friend.
Don't be surprised to find that Amazon's revenue and margins become squeezed as content owners sell directly to the consumer, bypassing Amazon altogether. OK, back to the fair-market pricing of Amazon if investors treated it the same as its peers.
This year, Amazon is expected to make about 15 cents a share. Next year, when this does that, and that does this, and the other thing, analysts expect Amazon to earn about $1.82 per share. "Larry the Liquidator" likes round numbers, and so do I. For the sake of argument, and in honor of Bezos' use of "other people's money," let's say Amazon makes $2 per share next year.
Google is trading with a forward multiple of 14.6. If Amazon traded at 15, the price would be $30 a share. Keep in mind that Amazon has been a "startup" for a longer time than Google.
EBay is trading for a forward multiple of 18.1. For Amazon, that would be a price of $36.20 per share. EBay is especially interesting because so many merchants sell on both platforms. Amazon has its payment system, but so does eBay with PayPal. And, yes, Amazon is older than eBay too.
For Microsoft, we will use a forward multiple of 9, and I didn't bother plugging that one into the spreadsheet. Amazon would trade for $18. Wal-Mart has a PE of 14, bringing Amazon shares to $28, and finally we have Apple.
Apple's metrics are far superior in so many ways that to focus on a few key numbers doesn't do it justice, but the meaning comes across.
As a company, Apple has a market capitalization over five times larger than Amazon. Last year, Amazon made about $631 million in profit versus over $25 billion (with a "b") for Apple. For revenue, Apple collected over $108 billion compared with Amazon's $48 billion.
For liquidity, Amazon has about $2.8 billion versus Apple's war chest of well over $100 billion. Apple doesn't have to worry about Amazon entering deeper into its space, but Amazon should be frightened to death that Apple may move further into Amazon's offerings.
If Amazon sold for a multiple of Apple, Amazon would trade near $20.50 per share. You can say what you like about future profitability of Amazon, but the company has already reached the scale that increasing revenue by another double and then another double is highly debatable. Remember that Amazon's profit this year is expected to fall far short of a dollar. Next year $2 is expected, and if we push that to another double ($4) and a double after that, we have a total of $8 earnings per share.
With $8 earnings per share, Amazon should trade for about $96 if it's valued like Apple. A much smarter play is to continue with the greater fool theory if you want to own Amazon. Betting that some fool will come along and pay even more for Amazon worked great in the past year (mostly).
Dollar for dollar invested, Apple tastes much better.
Disclosure: The author does not hold a position in any stock mentioned.