2020 has been an incredible year for ” FAANG stocks.”
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.
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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.”
Investors should take note of this fact, according to Johnson. “On this count, Apple hits it out of the park. Apple customers are incredibly loyal and routinely trade in their iPhones when an upgraded model is made available.”
With the recently announced Apple Fitness+ wellness service as well as the Apple One services bundle, the company continues to expand its ecosystem to keep customers coming back while simultaneously providing consistent revenue.
[See: The 10 Most Valuable Tech Companies in the World.]
Amazon Is in Its Prime
With retailers closed and people locked up at home, online shopping has become downright essential.
Amazon, which accounts for about 40% of online retail sales in the U.S., has benefited greatly from the disruptive events of 2020.
Last quarter, the company reported a 40% year-over-year increase in sales of $88.9 billion as its e-commerce revenue grew a whopping 47.8% thanks to increased demand. A 160% increase in online grocery delivery capacity contributed to this impressive growth in Amazon’s online retail business, while grocery sales tripled in the recent quarter.
This incredible growth in Amazon’s main business has investors giddy, and as the pandemic continues, it seems likely that sales will remain elevated — especially with the forthcoming Amazon Prime Day from October 13 to 14 and the subsequent holiday shopping season just around the corner. There’s just one problem: e-commerce is expensive. Higher inventory, faster turnaround times and pandemic-related protective gear cost Amazon a lot of money.
As a result, e-commerce isn’t as profitable as investors would like to think. Luckily for Amazon’s shareholders, there’s another business segment that continues to bring in the big bucks: Amazon Web Services (AWS).
Cloud computing has taken the business world by storm over the last few years, and with many employees at companies around the world working from home during the pandemic, the importance of cloud computing has only grown. AWS provides those companies with cloud services and has continued to enjoy strong demand throughout the pandemic, with revenue in the second quarter growing 29%.
Most importantly, AWS is profitable; cloud computing made up 12% of Amazon’s total revenue last quarter but accounted for 57% of the company’s operating income. While revenue growth at AWS has slowed year over year, it will remain a key part of Amazon’s overall strategy and the investment thesis for the company.
[READ: 8 Top Internet and E-Commerce Stocks to Buy]
Bottom Line: Which Stock Should You Buy?
So which of these stocks shows a competitive advantage?
In the near-term, Amazon’s pole position in online retail will continue to reap the company massive rewards, but that growth has been priced into the stock. Meanwhile, Apple’s business is built to last and its valuation makes it less pricey than its rival.
According to experts, Apple has the edge. “Amazon relies on pricing power and scale for its dominant market position, whereas Apple has built a sustainable ecosystem where switching costs become increasingly high,” Bilsky says. “Both are great businesses, but I believe Apple’s model allows it to have a more predictable revenue stream and ability to increase margins over time.”
“If forced to choose, I would opt for Apple purely from a valuation perspective,” Johnson says. “Both stocks sell for a premium to the forward P/E on the S&P 500 of 22 times earnings, but Apple sells at 30 times forward earnings and Amazon sells at (around) 60 times forward earnings. I believe there is more margin of safety with Apple than with Amazon, and Apple has a very strong balance sheet and a huge cash hoard — almost $5.50 per share.”
To be frank, both companies make for excellent additions to any portfolio and neither will disappoint investors — but at the moment, Apple seems like the better option.
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Apple vs. Amazon: Which Stock Is the Better Buy? originally appeared on usnews.com
