Yesterday, after the market closed, two giants of tech with very different profiles and public perceptions reported earnings for the quarter that ended on March 31st. Stock in both Amazon (AMZN) and Microsoft (MSFT) rose in late trading after their releases, Microsoft on a beat of expected EPS ($0.68 versus $0.63) and Amazon presumably on relief that they hadn’t missed again (EPS was exactly at consensus and revenues were pretty close too, but four of the last five quarters have seen AMZN’s earnings short of estimates.)
The two companies could not be further apart in the way that conventional wisdom sees them. Amazon and CEO Jeff Bezos are seen as disruptors and innovators. Indeed, following the announcement, Bezos himself said “We get our energy from inventing on behalf of our customers, and 2014 is off to a kinetic start” (incidentally, the writer in me is impressed by the use of the word “kinetic” rather than the more common and somewhat clichéd “dynamic," but I digress.)
Microsoft was once perceived that way, but now, it seems, is seen as more on a par with IBM (IBM); a tech company, but without a tech company’s spirit. They were behind the curve in tablets and mobile in general. They were even slow to what is now one of their most profitable areas, cloud based enterprise services. All they did was to make money.
The stocks are seen differently, too. It is a story of growth versus value; potential versus profit. AMZN is the ultimate growth stock, with investors shrugging off three digit multiples of both trailing and forward P/Es. MSFT, on the other hand, languishes around a forward P/E of 14 and consistently trades at a discount to the broader market.
As different as they are, however, I believe both stocks are a buy for longer term investors. In the current atmosphere, with “growth” being seen as a dirty word, it is hard to jump in and buy Amazon, but early price action this morning has the stock falling sharply back toward support at the $300 level. That previous support makes that a logical level to buy.
Of course, to do so, you have to have faith in Bezos’s Google-like attempt to take over the world, but even as growth and risk go in and out of fashion, innovation remains a positive in my mind. That is never in short supply at Amazon.
MSFT, in contrast, is trading higher this morning despite more worries about Ukraine putting pressure on the market in general. Of course, this is partly just in reaction to the earnings beat, but it also reflects the stock’s new found status as a defensive play.
This combination of a high risk, high multiple growth stock with potential and a low risk, low multiple value stock with profits makes perfect sense to me in the current environment. At some point, sentiment will turn and potential and growth will be back in vogue. At that point AMZN will look cheap at around $300 despite the current multiples. Until then good old boring MSFT can keep chugging along.
Growth versus value and potential versus profit are two of the oldest debates in investing. As usual when two extremes are debated, the best path lies somewhere in the middle. Buying both AMZN on the way down and MSFT on the way up is a way of achieving that middle ground. Take a side in the debate by all means. Shout loudly in favor of your choice and deride those who can’t see the light. Whichever side your head and heart are on, though, keep your money in the middle.