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At 10:30 yesterday morning I thought, for a shining moment, that I had at last managed to write a perfectly timed column. After warning in the morning’s letter that rising bond yields were becoming a significant problem for stock prices, I was watching with satisfaction as yields took another big step up, and stocks acted like they were about to properly fall out of bed. What happened next? Stocks rose, of course, and closed almost flat. Maybe next week is my week to be prescient. Email me: robert.armstrong@ft.com.
Amazon vs Apple
This is interesting:
That’s the relative performance of Amazon and Apple since the beginning of 2015. From 2015-18, Amazon outperformed Apple dramatically, with an intermission of underperformance in the middle. Since 2019, the reverse has happened. Over the whole time frame, it’s been a wash, and both stocks have been great investments (Amazon’s annual rate of return over the period is 28 per cent, to Apple’s 27).
This raises a question: what will the next leg of this graph look like? Which stock would you rather own, at the current price, over the next few years?
The question is academic, of course. Real investing is never about picking between two options. One can own both, neither, or a mix of the two, and that mix will depend on what else is in the portfolio. Still, the question is interesting inasmuch as the two businesses are very different and are valued in very different ways, despite the fact that they are often lumped together in the “magnificent seven” big tech club. Which one you prefer, and why, will reflect (a little of) what you think about the future of technology. But it will reveal more about how you think about stocks and investing.
Start with with a crude description of the contrast between the two. Amazon is a two-part infrastructure business, with a dominant online consumer retail operation and a leading cloud computing operation serving businesses. It has increased revenue very quickly — above 20 per cent a year for most of the past decade. The business as a whole is capital intensive and has low margins. It reinvests most of its cash flow internally, paying no dividends. Apple, on the other hand, is a super-high-margin business selling high-end devices and services to consumers. It deploys most of its massive free cash flow paying dividends and buying back shares.
The choice between the two stocks will divide investors by approach — or, if you prefer, bias. Growth lovers will stump for Amazon, and value types will choose Apple. As a hopeless and recidivist devotee of value, I’m strongly biased towards Apple though, in this case, I think my bias happens to be right.
(I should note that my preference only extends to Apple’s stock. Comparing the companies, I am much more interested in Amazon, and I admire it far more than I do Apple. But that’s a whole different story).
Second-quarter results for the companies — both of which hit the wires yesterday afternoon — slotted nicely into this crude characterisation. Amazon revenue increased by 11 per cent from the year before. Apple’s revenue was flat, and its earnings per share grew mostly because the company is reducing its share count with buybacks.
Taking a step back from a single quarter’s results, however, the neat value/growth dichotomy has blurred. This is for two reasons. Apple’s valuation has risen, as investors have piled into Big Tech. The stock traded consistently under 20 times earnings up until 2019; now it trades at over 30 times. (Investors have never much cared about profits at Amazon, because the company has never been run to maximise them; it has always traded at an incomprehensibly high p/e).
More importantly, Amazon’s growth has slowed. Here is a chart of growth at the two, including Wall Street estimates for the next several years:
Over the past decade Amazon was, on average, had much stronger growth (notice that the 2015-18 period where Amazon’s growth was accelerating and Apple’s was slowing unevenly corresponds to the period in which Amazon shares outperformed). But last year the two companies grew at almost the same rate.
Looking at the consensus estimates for growth through to the end of 2026, it is interesting that Wall Street predicts that the old growth differential between the two will reassert itself, just as it did in the most recent quarter. The expectation is that Amazon will expand in the low double-digits, and Apple in the mid-single digits, for years to come. And that fact represents half of a value-driven case for owning Apple rather than Amazon.
I don’t know how fast the online retail and cloud computing industries will grow in the next few years, or whether Amazon will take or lose share in those businesses. In fact, I would argue that no one knows this. Growth is very hard to predict. But there is something I do know. Growth in both of Amazon’s core business has been slowing, and the stock seems to price in the expectation that slowing stops, right now.
Maybe Amazon will grow at 10 per cent forever. Maybe it will grow even faster. But most things don’t. Expectations for Apple are a bit lower, and I like that (though I wish the stock were cheaper still).
Which brings me to the second half of the case for Apple over Amazon: the financial environment might be becoming more hostile for bets on long-term growth. Inflation and rates are higher and liquidity is tighter than they were a few years ago. If this persists, then investor risk appetites will probably diminish, and Apple’s mountainous cash flow will start to look more appealing than Amazon’s promise of ever-greater world domination. In other words, after a long run for growth, value may be having its day.
Amazon’s leadership might see the writing on the wall and shift the company’s emphasis away from investment in the future and towards present profit. But that process, which will involve a big shift in the shareholder base, is going to be bumpy, if it ever happens.
In short, I expect Apple’s outperformance over the past few years to persist over the next few. Is this just my (declared) value bias speaking? Possibly. If any readers want to take up the case for Amazon and growth, consider this an invitation to do so.
One good read
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