Interestingly today I came across an article from Paul Santos who delves into a similar issue except he focuses just on Amazon and Apple. You see Amazon trades at a forward P/E of a whopping 193 while Apple trades at a forward P/E of 12. Here however are the important points:
Apple [is] growing revenues faster than Amazon, growing earnings, and growing estimates. Amazon not only has revenues that grow slower, but its earnings have been falling for two years straight. Amazon's earnings are also predicted to fall in 2012 vs. 2011, and its next-quarter earnings are predicted to fall 95% from the year before. Finally, Amazon's EPS estimates for the next quarter were slashed 90% just days ago.
Santos surmises part of the reason for this discrepancy has to do with the fact that more managed mutual funds own shares in Amazon as a percentage compared to Apple. In fact the ratio is about 19.4% to 10.7% for Apple or about double.
In addition he believes investors are concerned about putting too much money in a single stock – specifically Apple.
Moreover he points out there is a lack of large-cap growth alternatives and companies like Microsoft, Cisco, Amgen and Dell are no longer in this category.
He believes that the advent of a Facebook IPO may change things – he also mentions a Zynga or LinkedIn growth spurt could result in money moving out of Amazon and into one of these other players.
I have to say I am torn on the issue because I see cloud computing as such a massively growing business and at the recent Interop 2012 show it seemed myriad cloud infrastructure and software companies were targeting the 800 pound cloud gorilla Amazon. Of course competition can reduce margins and even marketshare but Amazon is in such a position of strength it is tough to see them being significantly damaged in either area in the next few years. Moreover as a defacto ecommerce leader, the company seems so well positioned to clean up as brick and mortar retailers continue to go belly up.
But to have a P/E 16 times greater than Apple when Apple has shown itself virtually immune to pricing pressure is shocking. Moreover, it seems Cupertino can perform regardless of the macro-economy.
Having said all this – I am now wondering if Amazon – a company I wish I owned isn’t a better short in conjunction with a paired long-position in Apple.
Santos disclosed he was short Amazon as well and it does seem like this sky-high valuation will have to come back to reality at some point. Then again, people have lost fortunes betting against Bezos. I consider him to be a genius and perhaps one of the smartest businesspeople out there. But then again, no one is infallible and a person’s intelligence doesn’t make the market rational.
Update: TheStreet has an article which says you should sell Apple and buy Amazon because P/Es no longer matter - confidence in management is more important. Sounds awful dotcomish to me.
Disclosure: I do currently own Apple shares and haven’t decided if I will put on the pair trade discussed above.