These are the Big Tech companies behind the products and services that most investors use every day: Facebook (ticker: FB), Apple (AAPL), Amazon.com (AMZN), Netflix (NFLX) and Alphabet (GOOG, GOOGL). Two of these companies in particular have a bright future ahead of them.
Apple stock has risen by more than 58% since the beginning of the year, and in spite of supply constraints due to pandemic-related production delays, the company continues to enjoy impressive results in its products and services segments.
Meanwhile, Seattle-based Amazon has been one of the few companies on the planet to directly benefit from the pandemic, with online shopping exploding in importance and cloud computing expanding – and as a result, AMZN stock has risen 69% year to date.
If you had to choose one of these two excellent companies to invest in, Amazon stock or Apple stock, which would it be? Let’s take a closer look:
- Apple versus Amazon.
- Apple stock.
- Amazon stock.
- The bottom line.
- Apple vs. Amazon
Each company has seen incredible appreciation in its stock price over the last few months, leading to big increases in both of their valuations.
Apple stock has a forward price-earnings ratio of 30 – well above where it sat at 17.3 in September 2019 and its trailing P/E of 34.6 is up from 19 over the last year. Meanwhile, Amazon’s forward P/E of 57.8 is up from 44.8 last year, while its trailing P/E is significant at 116.1, compared to 72 last year.
Purely from a valuation standpoint, it’s clear that Apple has less growth priced in than Amazon – meaning investors looking for value may want to start there. Yet there’s a reason investors are bullish on Amazon’s growth prospects as the company profits from the pandemic and will likely continue to do so well into the future.
Valuation isn’t everything – fundamentals matter, and each company has a business model that could very well meet these high expectations.
It’s impossible to make an exact comparison between Apple and Amazon, but both companies have important portions of their respective businesses that investors need to know more about before making their decision. In fact, Apple and Amazon both have one tried-and-true business segment and one new, fast-growing segment on which their future success depends.
The Apple of Investors’ Eyes
For Apple, its most important product is the iPhone.
The iPhone accounted for 44% of Apple’s net sales in the third quarter. With just less than 14% of the global market share, the iPhone is still a dominant smartphone powerhouse despite the fact that sales have been slowly falling over the last few years. Yet all is not lost for Apple, with its latest iPhone 11 and iPhone SE turning things around nicely, sending iPhone revenue up 2% last quarter while Apple’s active installed base of iPhones reached another all-time high.
It’s important for Apple to sustain the iPhone’s momentum, and with the rollout of 5G – fifth generation technology – just around the corner, it seems likely that consumer enthusiasm could propel sales even higher. Jeff Bilsky, senior analyst at Chartwell Investment Partners, agrees: “This growth looks primed to continue with several exciting catalysts on the horizon, specifically around 5G.” With so much of the company’s revenue still coming from iPhone sales, “investors are excited about a faster upgrade cycle due to consumer desire for 5G-connected phones,” Bilsky says.
While Apple’s iPhone sales waffle, its services division is quickly growing more important. Apple divides its business between products and services. Products include things like the iPhone, iPad and Mac, while the services segment includes the App Store, Apple Music, Apple Pay and, most recently, Apple TV+. Across all of those services and more, Apple had 160 million paid subscribers in the third quarter of 2019. This year, that number ballooned to an incredible 550 million.
Despite that absurd growth, the iPhone is still Apple’s bread and butter – yet the importance of services can’t be overlooked, as Apple’s sticky ecosystem is key to keeping consumers from switching to other smartphones.
“Switching costs are simply one-time costs or expenses that consumers must incur to change from one product provider to another,” says Robert Johnson, professor of finance at Creighton University. “High switching costs lead consumers to stand pat, behavior that essentially provides an annuity cash flow to the provider. And switching costs aren’t exclusively monetary costs but also take into account the time and effort necessary to switch providers.”…Read more>>