Wall Street Embraces Amazon, Shuns Apple

by Matt Klassen on February 7, 2013

One company posts record gains, yet sees its stock plummet, while the other is barely able to eek out of a profit yet sees its stocks sore. The quarterly fiscal results from Apple and Amazon couldn’t be more different, and as Derek Thompson from TheAtlantic.com wrote last week, neither could the inversely contrasting responses from Wall Street.

In an article titled, “Why Amazon Is Special and Apple Is Not—in 1 Paragraph,” Thompson examines the logic behind Wall Streets response, curious why investors would shy away from a company like Apple who posted substantial gains over last year, while they embrace a company like Amazon who, for all intents and purposes, took in on the chin over the same period.

The answer, according to Thompson, is surprising simple: Apple is in the wrong business…at least from an investor’s perspective. By playing the high stakes game of high margin technology, Apple is essentially “a deer that wears a bull’s-eye on its flank,” welcoming competitors to take a shot at dethroning the technology king, whereas Amazon, despite its struggles, has no one targeting it because it really has no competitors, and that’s what investors like.

I would call it one of those market anomalies that appear more as a blip on the financial radar, expect for the fact this sort of investor behaviour isn’t a recent or unusual phenomena, its being going on for the better part of a decade.

While Apple reported a 17 percent increase in revenue, which climbed to $54.5 billion, and that the company’s share price beat the consensus earnings estimate of $13.55 in Q4, the next day Apple’s stock took a veritable beating, falling some 12 percent; all from a company who sold 10 million more iPhones and 7 million more iPads than it did a year previous.

Now compare this to Amazon, who saw its Q4 earnings drop a staggering 45 percent (some $97 million) from the year previous. While sales did increase and profit margins were up a slight 3.2 percent—which doesn’t even compare to Apple’s gross margins of 38.6 percent—Amazon’s stock gained 10 percent in after hours trading. Weird or what?

The answer to this strange Wall Street behaviour may have a relatively simple answer, however, as Thompson explains:

Apple’s core business is something that practically everybody wants to do (and can do): making phones and tablets. Amazon’s core business is something that practically nobody wants to do (or can do): build a massive online database and offline infrastructure to transport boxes from warehouses to hundreds of millions of doorsteps. Seen in that light, Amazon’s low-margin game isn’t a weakness. It’s arguably a strength, like a treacherous castle moat discouraging even the most swashbuckling entrepreneurs from daring to encroach on their turf.

The concern with Apple is that it’s far too successful in a high margin market that screams for competition, and ultimately an incumbent downfall; the sort of risk that many investors shy away from. Amazon, on the other hand, has build its empire on ground no one else is willing to trod, an unassailable position that generally means more stable revenues compared to Apple’s cyclical product-based earning trends.

So what does this all mean? For starters its means that playing the high margin mobile game is profitable, yet ultimately unsustainable, simply for the fact that everyone wants a piece of Apple’s pie. While Amazon’s low margin game might not be as flashy, it’s certainly a great deal more stable, and its why many think Amazon is the company to watch over the next few years.

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Written by: Matt Klassen. www.digitcom.ca. Follow TheTelecomBlog.com by: RSS, Twitter, Facebook, or YouTube.

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