I've long been
bear. But we're all capable of change.
#-ad_banner-#When AAPL fell more than 40% to just under $400,
the forward price-to-earnings (P/E) ratio fell to barely 10 and
the dividend grew to just over 3%. The stock suddenly made sense
from an investment standpoint, and I began including it in client
Similarly, I was the lone Android user in a house full of
iPhone users. But when my contract expired a few weeks ago and my
carrier offered me a free iPhone 4S, I became an adopter (if not
Having used an Android device for a few years, I used
cloud music player and built a decent cloud library. When I
switched to the iPhone and downloaded the Amazon cloud app, I was
immediately bombarded by offers from Amazon to buy MP3 albums
from my favorite artists at $5 a pop.
Amazon knew I had switched devices and wanted to keep me from
straying to iTunes. So far, I'm still loyal.
But as an investor, I would buy Apple's stock before Amazon's.
A few numbers explain why.
For the life of me, I don't understand why anyone would own
Granted, Amazon has changed the way people shop. Amazon has
built a massive business, but the margins are razor-thin (even
after the recent price hike to its popular Amazon Prime shipping
service). The company is evolving from a content seller to a
content generator and manager with its popular streaming
services, successful cloud product, and its foray into original
But after 17 years, it's time for Jeff Bezos and company to
prove Amazon is a viable business.
All Grown Up
As I said, I'm a reformed Apple bear. But I'm also a value
investor, and I recognize a good opportunity when I see one. AAPL
is becoming one of those dependable "bondlike" stocks, with
consistent net margins of 20%-plus over the past five years and
20% dividend growth.
But is that growth sustainable? The iPhone has lost its market
share crown to Android, so the hardware-driven annual growth of
40% in sales and net income is probably a thing of the past.
Mobile devices represented 76% of Apple's $170 billion in
revenue last year. The content business (defined as iTunes,
software and services) represents just 8% of the sales mix.
Furthermore, the content division's margins are reported to be
close to 90%, compared with 37% for the company as a whole.
Content Is King
As I learned from changing from Android to iPhone, at the end of
the day, it's not the device itself that matters -- it's all
about what's on the device. That's where the money is to be
Consider the example of RCA (now
), which created NBC in the roaring 1920s to broadcast
programming over the millions of radio sets it was selling. NBC
is still around as a content company.
Amazon began as a content company and has added hardware to
the mix. Apple had long been a hardware company until the birth
of the iPod and iTunes. That changed everything. Amazon realized
it needed some form of hardware presence, thus the Kindle, Fire
and recently announced Fire TV set-top box.
Long known for its hardware, Apple realized that it couldn't
command premium prices forever, leading to the development of the
iPad Mini and the iPhone 5C. Last year, Apple celebrated its 50
billionth download from its App Store, so the company knows the
trend toward content is the natural evolution of things.
I don't think Apple will screw up in expanding a portion of
the business that's capable of keeping 90 cents of every dollar
it earns. The company's little gadgets should continue to
surprise and delight -- while the stuff consumers do on the
gadgets should earn money for investors.
Risks to Consider:
The biggest risk is Apple's ability to execute. When
three-quarters of your business comes from one segment, managers
tend to become myopic. Another glaring risk is Apple's eventual
earnings deceleration. Any hint of this will punish the share
price, which can appear expensive.
Action to Take -->
From an investment standpoint, Amazon vs. Apple is classic growth
versus value. However, in Amazon's case, I don't see either due
to the erratic nature of its numbers. Apple represents true
Shares currently trade near $540 a share with a forward P/E
ratio of 12.6 and yield 2.3%. The stock has all of the
characteristics of a classic large blue-chip company. Based on
the huge opportunity the company has to grow its high-margin
content business, the current valuation of the stock is a good
entry point for long-term investors. I hesitate to put a
near-term 12-month price target on the stock due to the
possibility of near-term volatility.
Apple shares should be purchased cautiously, and any pullback
in price should be used as an opportunity to buy. Investors
considering Amazon shares should not see a pullback as a buying
opportunity, and those holding AMZN should seriously consider
realizing gains or cutting losses.
© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.