In what world should Amazon enjoy more future confidence than Apple?

In what world should Amazon enjoy more future confidence than Apple?

There is no question that Apple has done some amazing things. It has become the largest company in the world, by market value, because it has redefined industries. It redefined the music business, it redefined smartphones and it redefined tablet computing. Apple did not invent these businesses. Most observers would argue that the likes of Handspring/Palm and RIM invented smartphones and stylus-oriented computing devices, including Apple's Newton and Microsoft's Tablet PC certainly pre-dated the iPad. But Apple massively and permanently redefined consumers’ expectations in these markets. While doing so, they built up an incredibly profitable hardware business.

Amazon is a different beast. It, too, has redefined a something -- e-commerce. Amazon makes everyone else look irrelevant, including giants like Walmart. Amazon also re-invented books with the Kindle, and you could argue they re-invented the Internet by introducing all sorts of cloud computing and cloud storage services.

While both companies have been incredibly successful at disrupting past industries, Apple is the one with a track record of doing this profitably. Amazon, on the other hand, doesn’t really make much money at all yet.

Let’s look at some actual numbers, shall we? Here’s how the last 12 months shakes out for both companies according to data from S&P Capital IQ. Amazon brought in $57 billion in sales with operating income of $531 million. That’s slightly less than a 1% operating profit margin. Apple brought in $157 billion in revenue, with an operating income of 55.2 billion. Apple’s operating profit margin is 35%. The difference is nothing short of night and day.

So why is it that Apple’s stock hasn’t actually outperformed Amazon by that much? Year to date, the two stocks are both up about 40%.

Despite the impressive difference in profitability between Apple and Amazon, the web shopping giant enjoys more confidence from Wall Street on future earnings potential. We can look at both companies’ enterprise value to sales ratio to see this.

Enterprise value (EV) is a company’s market value excluding cash and debt, so it represents the value of just the business. A higher ratio of EV to sales means the market values a dollar of sales higher than, say, a company trading at a lower ratio.

Apple’s EV/S multiple is 3.5x, whereas Amazon’s is 1.85x. Amazon should trade at a lower multiple considering its operating margin is just shy of 1% while Apple’s is 35%. But Amazon’s EV/S ratio trails Apple’s by half.

Let’s put this in perspective. If Apple holds its profitability ratio constant, Amazon would need to improve its profitability ratio by about 18x for Wall Street to be paying an equivalent value for a dollar of sales by either company.

I don’t actually think Amazon is overvalued here. That’s just my opinion, but I see a lot of value in what they are doing to build a long-term profitable platform on which to conduct e-commerce.

The market has more future confidence in Amazon because it seems easier to justify. Amazon’s profit margin is next to zero, and seemingly has way more upside (as they scale) compared to Apple. After all, Apple could face pressure from the onslaught of Android devices and from Amazon’s own Kindle Fire platform.

If you think about how Apple implemented the App Store, it changed the way we all think about what we are willing to pay for software. Apple makes money from hardware, so what they’ve done is in their own best interests. Apple makes incredibly good software, but it’s packaged with hardware and justifies the fat margins they make. But they have no interest in helping developers keep software prices high. It does them no good.

In much the same way, Amazon doesn’t care about making money on hardware. They’re in the e-commerce, e-book, streaming media and cloud computing business. They could care less about selling hardware for a profit. It is in their best interests to quietly destroy the profitability of mobile computing hardware, harming their competitors (such as Apple) while building up their profits where others have a hard time competing.

I’m always a fan of balanced analysis. Yes, I’m a huge Apple product fan and I own the stock. I think it’s got a lot of room to go higher. I think it’s crazy that Wall Street is acting as if Apple “needs” to invent a whole new multi-billion dollar market in able to continue growing. But I do see value in having the debate. After all, most of Apple’s profit is now tied to the iPhone and iPad. If Amazon or anyone else is successful in crushing profit margins on hardware, Apple will suffer.

If anything, I think this illustrates just how important it is to control a platform, not just sell hardware running some else’s operating system and apps.

So, iMore readers - what’s your take? Do you think Amazon can destroy pricing on hardware as Apple has on software? Or has Apple’s power become too significant for any low-cost maker to overcome at this point?

Chris Umiastowski

Chris was a sell side financial analyst covering the tech sector for over 10 years. He left the industry to enjoy a change in lifestyle as an entrepreneur, consultant, and technology writer.

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There are 28 comments. Add yours.

Carioca32 says:

"largest company in the world, by market value"

This is nonsense and it baffles me whenever I read this statement. Apple has the highest market value among companies that are publicly traded, and according to Fortune, is the world's 22nd largest company.

Saying that Apple is largest company in the world, by market value, is the same as saying that Samsung is the largest company in the world, by smartphone sales, and Amazon is the largest company in the world, by e-commence, or that Foxconn is the largest company in the world, by idevices production.

Chris Umiastowski says:

You may not understand it, but it definitely makes sense.

If I had unlimited money it would be easy to create the world's largest company by selling $100 for $95. I'd have unlimited business and be larger than every company in the world, in no time, BY SALES.

Ranking companies by sales doesn't make them "bigger" if you care about profits.

CORYK333 says:

Chillin' with that Rene dude a lil too much...rubbed off i guess

Dev from tipb says:

A world where investors do not have perfect knowledge of future inventions.

The market simply recognizes Amazon as a safer bet, as retail and services are not nearly as vulnerable to violent disruption. When it happens, it is usually a result of the introduction of new tech or consumer behavior reaching a tipping point (see: Sears catalog vs Amazon). A paranoid company like Amazon will have tea leaves to read to prepare for these sorts of disruptions. They could still screw it up, but it is largely their game to screw up.

Computers and consumer electronics, on the other hand, are constantly being disrupted by directions neither they nor the market ever sees coming. While I can't see anything on the horizon cutting the iOS family off at the knees, few people would have seen RIM's position 7 years ago, or Microsoft's 15 years ago, or IBM's 25 years ago, or WANG's 35 years ago. It's an old story -- tech titan toppled by a threat they never saw coming.

As titanic as Apple is, as long as their profitability is tied up in a handful of such disruptable products, there will always be some segment of the market that is a little bit skittish of their long term prospects. If you think they are wrong, you should be able to pick up some stock at a discount.

Carioca32 says:

"In what world should Amazon enjoy more future confidence than Apple?"

Quite simply, in the real world. One has to look no further that Apple's own history, or RIM, or Palm. Tech companies rise and fall just as quickly, and while Apple has been enjoying a trend of explosive product launches, most of the public has perceived a slow down on innovation and "wow" factor, despite of how fans view Apple products. Steve Jobs was the real force behind Apple and his death has conflagrated a war inside Apple that pushed out one of his most trusted liutenants, Scott Forstall, the man responsible for Apple's arguably most successful product, iOS.

On the other hand, Amazon does not need huge innovative keynotes every six months, just need companies, whatever they are and wherever they are, to churn out goods and content. It does not depend on the design prowess of any single individual, or on it is a calm and stable company, in other words, a much safer bet in the long run than Apple.

In any case, I think current profits are good indicators for the short term, but have very little to do with the future, I mean how great were Apple's profits five years ago?

okli says:

*one of his most trusted lieutenants, Scott Forstall, the man responsible for Apple's most successful product... iOS* ??? ... so all the thousands of the best software engineers in the world was just standing around for all the years and watching Scotty pulling the white rabbits of his hat
...ait? DUDE... that's just another of so many myths created for AAPL manipulation ... the STOCK manipulation is the real reason behind the low Apple valuation...

Carioca32 says:

Well, stock manipulation was the reason behind the high Apple valuation in first place, or you really think a company that sells gadgets should have a higher market value than Exxon Mobil or RD Shell, companies with four times the revenue of Apple and sporting higher profits?

Anyway, Forstall was the man behind the decision to develop a phone OS based on the Mac OS kernel. Of course he did not develop it, no single person did, but without him Apple might have chosen other OSs for its phone.

iirishassassin says:

"Amazon brought in $57 billion in sales with operating income of $531 million. That’s slightly less than a 1% operating profit margin."

Where on earth does $531 Million = a less than 1% operating profit margin of $57 Billion?

parabel says:

He's talking about an American billion, so that means it's $57'000'000'000 in sales, so 1% is /100 = $570'000'000. So he's right in saying that $531 million is slightly less than $570 million.

iirishassassin says:

So operating costs are 1% of sales? 99% profit then? Doubt it.

FLskydiver says:

No, you have it backwards. 1% is the profit.

krislord says:

1% would be $570 Million, so it's correct....

Edit:

We haven't used used billion to be 12 0's since the 1970's in the UK. Billion = Thousand Million.

iirishassassin says:

No, it may be 1% of their sales.. but then that would mean that they are making 99% operating profit.

krislord says:

operating profit = 537million.

537 million / 57 billion = 0.94% operating profit margin.
that means their cost of sales + overheads were 56,463,000,000 (56.5 billion)

SockRolid says:

Re: "So why is it that Apple’s stock hasn’t actually outperformed Amazon by that much?"

Wall Street understands retail. Amazon is all about retail.
Wall Street doesn't understand tech. Apple is heavily into tech.
(And Facebook's IPO fizzle didn't help Wall Street forget the dot-com bubble.)

Apple is also heavily into infrastructure. Building out iTunes, App Store, iCloud, and all that current value-add and future disruptive innovation. Building out infrastructure takes years of careful planning, development, iteration, capital expenditure, facility construction, beta testing, and launch. Infrastructure takes many, many quarters to implement. And when Apple finally rolls out a new infrastructure (or adds a new device to the top of the ecosystem pyramid) it takes their competitors by surprise. It takes years for their competitors to even "get it." But alas, Wall Street only notices the current quarter's earnings call.

Finally, never forget that most analysts work for banks. They shill stock after their bank has bought tons of it. They spread negative rumors to drive stock value down before their bank shorts it. And when do banks short stock? When they think it has peaked, because it has run up quickly. Hence the current negative spin on AAPL. So utterly predictable.

minimo3 says:

At its current price, AAPL's P/E is slightly below Wal-Mart. In other words, investors think Wal-Mart will grow faster than Apple. Apple's main problem though is that it makes money, and too much of it. Once you actually start making money then your valuation will fall back into the low-mid teens like old world companies (even GOOG is in the high teens). If you don't make money (or barely any) and sell dreams then you're valuation is sky high.
Don't get me wrong I love Amazon as a customer. I think they have a horrible business model though. Amazon's value proposition is low prices. I buy stuff from them because its cheaper than other channels. Basically its Walmart on the web. The day someone sells the same item cheaper elsewhere I'm gone. As such Amazon has gone on record to say their goal is to reduce margins. That's great for shoppers, but that means they may have immense sales, but still make peanuts. The 1% margin may look fat compared to 5 years from now.
Their AWS business is no different. They've dropped prices several times in the last month alone. Its a race to the bottom.

SockRolid says:

Wal-Mart = retail.
Wall Street understands retail.
Wall Street doesn't understand tech.

Retail -> keep selling more and more stuff ad nauseam.
Apple tech -> disrupt markets that are ripe for technological innovation.

Problem with the latter, for Wall Street, is that Apple doesn't announce that they're going to take over the automotive computing market in 3 years. Or the television industry in 8 years. If any Wall Street analyst knew that kind of insider information, and if they acted on that knowledge, they'd go to jail. Analysts are all outsiders, they can only draw dots between past data points and blindly extrapolate that into the future.

Aenean144 says:

The market thinks Amazon will be able to make a lot of money. They are anticipating that AMZN stock will skyrocket when Amazon starts making a lot of money.

The market thinks Apple can't make any more money.

That's about it in my mind. Probably shouldn't put much thought to explaining irrational things...

StuartV says:

People buy iDevices (in part) because they want the content they can get from the iTunes store - and Apple, practically speaking, is really only selling their content to iDevice owners. I mean, do you know anybody who buys or rents a song or movie from iTunes for their Galaxy tablet?

Amazon does not have as much content to offer yet, nor are they selling their content in as many markets. But, Apple is much closer to market saturation there, which just means that Amazon will close a lot of that gap rapidly. And Amazon sells their content to anybody.

So, as Amazon (and Google Play) close the gap on the content offerings, more and more people will start to buy non-iDevices (for a lot cheaper than an iDevice) because they no longer need iTunes to get the content they want.

That is why you should have more confidence in Amazon's future. The advantage of Apple's "ecosystem" is rapidly diminshing and the appeal of paying the higher Apple prices AND being locked into that ecosystem is going down with it.

okli says:

*Your submission has triggered the spam filter and will not be accepted.* ??? WTF...iMore

okli says:

so on Amazon and Googl play Ure not locked into their's ecosystems???... in fact its NOT : "Amazon AND Google Play"... its... Amazon OR Googy Play... two different ecosystems... with Samy's TouchWiz ...three.... with all the other forked Andro-linux versions much more ...and ALL of them.... will lock U down !!!

StuartV says:

Ummm... no. I can buy my device from anybody and still use it to consume content from Amazon AND Google, if I want to. I do not have to use a Kindle to get Amazon content, nor do I have to use a Nexus device to get Google Play content.

This fact and the fact that Kindles and Nexii and other devices that will work with Amazon and Google are so much cheaper than iDevices is what is going to pull people away from buying iDevices. Look at the trends in the numbers and you can see that this has already been happening. Way more Android devices are being sold every quarter - now - than iDevices.

And since, apparently, Apple's huge profit margins are coming from, mostly, sales of iDevices, this trend predicts (in my mind) that, as I said earlier, it is very valid to have more confidence in Amazon's future.

Apple sells Apple. Amazon sells everything. When the fad changes (as the numbers show is already in progress), Apple will still be selling Apple and Amazon will be selling whatever the new fad is.

okli says:

iMore used to have freedom of comments... NOW... its highly censored freedom of COMMERCE !!!... just interested : WHO is paying for my EMBARGO... RENE ???

stefnag says:

Amazon and Samsung represent the antithesis to Apple and Google. They share a highly aggressive stance focused on selling, instead of development of innovative products and services. Amazon discounts deeply with the connivance of Wall Street. And it has forked Google's Android to it own purposes. Samsung copies and out markets Apple with look a like products. Both Amazon and Samsung are the new Wallmarts. Guess which one will buy Walmart and which one will buy Google?