October 26, 2012
Two of the tech world’s biggest disruptors are shaking up the stock market too. Earnings disappointments from Apple Inc. (AAPL) and Amazon (AMZN) have been received much differently by investors today, with Apple shares falling below the $600 mark in afternoon trading while Amazon rallied more than 5 percent.
Why the divergence? Investors are looking beyond the third-quarter numbers released Thursday and betting on results that may or may not show up next year.
For the third quarter, Apple reported a big surge in both profits and revenues – up 24 percent and 27 percent respectively. But the bottom-line number of $8.67 a share didn’t measure up to analysts’ forecasts, which ranged from $8.75 to as high as $8.84. Amazon reported its first loss since early 2003, announcing that third-quarter revenue rose 27 percent and U.S. sales jumped 33 percent, but that its year-earlier profit of 14 cents a share was transformed into a loss of 60 cents a share.
Although Apple’s revenue was slightly higher than expected, its margins dipped and analysts muttered that the poorly kept secret of the launch of a new iPad Mini weighed on sales of its “new iPad,” which made its own debut in March. That offset some of the success of the iPhone 5, whose sales propelled iPhone unit sales up 58 percent over year-ago levels. But the increase in iPad sales was smaller than forecast as consumers went on a buyer’s strike awaiting the newest, shiniest Apple tablet. The same phenomenon hit Apple during the second quarter, only then it was sales of iPhones that were affected ahead of the widely anticipated release of the next-generation iPhone.
The hit to Apple's share price may be the result of the slight earnings miss and the data on margins and iPad unit sales, but it’s also due to Apple’s bearish view of the coming quarter, which includes the holiday season. The company suggested it will see earnings of around $11.75 a share, while analysts had been forecasting a figure closer to $15.43.
Let’s talk turkey, though. Demand continues to outpace Apple’s ability to deliver the iPhone 5, and odds are that one or another version of the iPad is going to end up on holiday gift lists nationwide. Apple has proven – time and time again, since the launch of the first iPod almost exactly a decade ago – its ability to shake up the world around it and help shape the new environment to its liking. The iPad is now playing a part in killing off the desktop computer and the white version of Apple’s newly announced iPad mini quickly sold out online. And does anyone really want to be seen in public without a smartphone these days? The alternative is almost as shameful as going out in public in a powder blue leisure suit or having it become publicly known that you have an avocado-colored refrigerator at home.
You don’t buy Apple stock for short-term upward jolts in the wake of new product announcements. You buy on dips in the hope or expectation of profiting from the firm’s ability to make their customers feel incomplete and inadequate without the latest device in their hands over time, and its ability to command premium prices and prevent discounting.
There are some short-term risks ahead for the company’s stock, given the uncertainty of holiday sales and increasing concern about Apple’s ability to maintain its huge margins in the face of stepped-up competition. But unless and until there is a consensus among the consumer critics that the new products don’t offer enough of an improvement in functionality to warrant their price – or until a rival like Microsoft, Google or Samsung fully manages to crack the Apple code and generate consumer lust for competing suites of products – consumers worldwide are going to lineup to buy them, for themselves or as gifts.
Then there is the math to consider. However rapidly Apple’s share price has grown over the last several years, that growth rate has been outpaced by its earnings. That means that its price/earnings ratio has contracted as its price has skyrocketed, leaving it trading today at roughly the same level as the S&P 500, while boasting a significantly higher growth rate.
Not everyone can parlay disruptive power as effectively, however. Amazon’s Kindle has proven just as disruptive as the iPod, threatening traditional book retailing (bye-bye, Borders) and even the publishing industry. (This week saw layoffs at Simon & Schuster and then the blockbuster news that Pearson PLC is in discussions to sell the venerable Penguin publishing house to Bertelsmann, which would merge it with Random House.) But while Amazon has done a great job of shaking up the establishment – and its Kindle Fire is eating into the iPad market – its ability to profit from that upheaval is in even greater doubt today, in the wake of the company’s latest earnings announcement.
That is because Amazon is channeling its revenue into investing for future (it hopes) profits. Spending on technology soared 55 percent as Amazon powers into the cloud storage arena, and the margins on its new roster of Kindle e-readers and tablets are even more razor thin than on the tiniest device now on the market. (Some analysts have speculated that the Kindles are precariously close to being loss leaders for the company, so miniscule are their margins.)
Clearly, Amazon is counting on making its money from content sales, while Apple is playing a safer game by keeping the price of the iPad and iPad mini higher (adding to its cachet) while still emphasizing content. The strategies of the two companies continue to bring them in to more direct competition, as Amazon shifts its focus from the classic e-reader to the Kindle Fire, able to stream movies, TV shows, movies and audiobooks as well (all acquired from Amazon, of course). That model goes head-to-head with Apple’s iTunes franchise, which offers essentially the same roster of content.
Buying market share is a big gamble for Amazon, which isn’t sitting on the same kind of cash mountain that Apple is. Apple’s margins may have contracted slightly, but they dwarf those at Amazon, which hover around 2 percent. Amazon doesn’t pay a dividend (Apple’s yield is now north of 1 percent) and its P/E has become an absurdly distorted 270.8. In other words, at about $220, investors are over-paying in anticipation of tremendous growth that to date has shown few signs of materializing.
The bottom line? Amazon’s strategy is great for consumers looking for deals on tablets and even on content, but if you’re looking for investment returns from the Great Disruptors, it’s a no brainer: Apple is the stock to own.