Amazon’s ($AMZN) Valuation Is NOT Insane, Don’t Try Comparing It To Apple’s ($AAPL)

avatar By: IS
Date posted: 09.13.2012 (5:00 am) | Write a Comment  (1 Comment)

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Yesterday I stumbled upon a post on CNN Money: “Why is Apple so cheap and Amazon so expensive?“. I’m surprised to not see more of these articles. I mean take a look at the 2 charts that they posted and you will get an idea:

Then you can also look at the numbers:

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At first glance, you might think:

“Apple Is Sooooooooooo Undervalued Compared To Amazon”

And you might even want to open a new trade where you buy Apple and short Amazon. That would be crazy. Of course, Apple remains a strong value. I’ve said it was crazy to not own the stock, I picked Apple at the top of my 2012 tech rankings, as one of my 4 stock picks in the annual stock picking contest, etc. So yes, Apple is a buy, even after its big increase so far this year. The story becomes a bit more complicated when I try to value Amazon. You see, the company is playing a completely different game than anyone else right now.

Not Focused On Profits

Amazon has made some profits but I think it’s fair to say that it has not been a core focus. In a way, companies like Apple and Google are not entirely focused on profits either but rather on building quality products which have been translating into profits. But Amazon is in a whole other league…

It’s All About Infrastructure

There are many types of infrastructures but I’d say that Amazon’s shipping centers, its warehouses are the core that the company has been building for over a decade now. That has neabled Amazon to take a lead and make it nearly unstoppable. Amazon can basically ship anything to anyone in the US within 1 or 2 days. I’m exagerating but not as much as you’d think. It has also developed a very powerful distribution network in much of the Western world. That has taken a lot of time and has been very costly but it’s given Amazon a competitive advantage that will make it very difficult to overtake.

Amazon has also built the most efficient digital and physical publishing infrastructure. It can print on demand, without inventory costs, has been signing up new authors, established platforms such as Kindle Publishing Direct which make it easy for almost anyone to publish on Amazon, giving publishers many incentives to publish exclusively through its service.

The company has also built a cloud infrastructure so powerful that most of the huge online services such as Netflix use its AWS services in order to handle its traffic while others are storing their critical files, etc.

And just recently, Amazon has became a major player, with Apple and Samsung in the very lucrative tablet, establishing incredibly low prices since Jeff Bezos confirmed that its goal was not to make money on the sales of the Kindle tablets but rather when users eventually start using it to buy Amazon “stuff”

All of this has been built at extremely important costs, which has hurt Amazon’s short term profitability, big time.

Amazon’s (VERY!) Long Term Vision

The thing is, Jeff Bezos works invests in businesses or units that could only be paying off 10 or 20 years from now. He’s been right a lot in the past and his vision certainly makes a lot sense but. That being said, he won’t be right about all of these bets and it’s so difficult to evaluate the financial impact of the successes and failures of Amazon.

One Thing I Do Know…

I think it’s crazy to try to evaluate Amazon using the same ratio as Apple. They are so different and while it makes for a popular post, that doesn’t make it of any better quality. In fact, it reminds me of that Facebook post that said the company was worth $7 or something. What do I think about Amazon as an investment? I have a very tough time coming up with a value. What I do know is that using a P/E is useless in Amazon’s case unless you try to estimate earnings several years down the road. As well, I know that I could not short the company led by Jeff Bezos, and I can’t imagine how would dare doing that. Betting against one (if not THE) premiere companies of the 21st century that is on pace to dominating ecommerce seems like a dangerous proposition to me.

Disclaimer: Long Apple (AAPL)

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1 Comment

  1. Comment by professional — September 13, 2012 @ 6:44 am
    avatar

    Im sorry but you have not done real math when it comes to AMZN and future profits.

    I do not care about AAPL comparisons all we have to do is look at the mathematics behind what AMZN needs to make in profits some day since ALL stock prices are tied to profits long term.

    AMZN will not ever be able to make the profits that the high stock price is predicting. Its mathematically impossible.

    Conclusion at some point the market will wake up to this fact and AMZN stock will decline at an extreme rate.

    YES AMZN is a great company but anyone hold the stock today should prepare for a large drop within 2 years. People hold out hope only so long then they decide PROFITS are required.

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