Something is definitely broken with the market. What follows is proof of this.
Let us say that you were all-seeing. And back on June 29, 2007, when Apple (AAPL) presented its original iPhone you totally knew that this was going to revolutionize the mobile phone market. Not only did you know that, but you knew that the thing would sell so much, Apple would turn into the most profitable company on earth, and would build the largest pile of cash anyone had ever seen.
At the same time, you also knew that Amazon.com (AMZN), then growing strongly and about to report a profit of $476 million during 2007 ($1.15 per share), would over the next 5 years see its profits fall all the way down to zero.
What would you expect this incredible foresight to produce? Wouldn't you expect it to produce a massive outperformance for Apple over Amazon.com? After all, this was about the most radical of differences one could ever imagine to happen - for a company to jump into the world's profit leadership, while the other, trading at a premium already, was going to see all its profits vanish…
Yet, what happened? This is what happened:
Although Apple did nicely, Amazon.com almost kept pace! And every day that goes by news and analysts talk about how Apple might have reduced component orders, while simultaneously heralding one or more of Amazon.com's businesses that could lead to improved margins. Not only that but analysts regularly ignore when Amazon.com itself reduces component margins, sometimes radically as it happened with the Kindle eReader. Why the dual treatment?
It's hard to understand why the analyst community has decided to continually promote Amazon.com. At the tail end of 2010, Amazon.com was expected to earn around $5.50 during 2012. 2012 came and went, and Amazon.com should report earnings around zero overall. How can a stock trading at a premium continue to justify its premium with such massive miss regarding the expectations built into the price?
Not only that, but the research on Amazon.com regularly claims that the earnings are depressed voluntarily. If this is voluntary, then why is Amazon.com changing the terms on Subscribe & Save multiple times, always to the detriment of its customers, to try and improve margins? Amazon.com has lowered the discounts, there are reports of increased pricing, has removed the chance to receive additional items outside the schedule and has made the schedule such that people can have to wait a full month for their orders (this was made to consolidate shipping, obviously). These changes took place without the customers being informed, and there are many furious customers in Amazon.com's message boards. This is not consistent with a company that can voluntarily increase its own margins, it is much more consistent with a company desperate to increase its margins to the point where it can lose its own customers.
Apple on the other hand gets scrutiny for every little problem, every little miscalculation, every little earnings miss. This happens even though Apple has grown its business massively.
Although some worries can crop up regarding Apple's dependency on the iPhone, at the same time one has to ask if Apple's future prospects are so dire. Apple still has a chance to enter new markets such as the TV on the living room. And granted, having Apple at Microsoft multiples already discounts no growth any way.
While there is no certainty regarding the future, we can look back and see what happened after world-changing events such as the launch of the iPhone. Since then, Apple has turned incredibly profitable while Amazon.com has seen its profits disappear. Yet, the two shares had similar performances over the last 5 years since that event. Something is deeply wrong with this picture, even if we believe the prospects for the future for these two companies can vary a lot.
My own take is that Apple is too often punished, while Amazon.com is endlessly promoted even in the face of very real facts that run counter to the accepted story. At some point reality will reestablish itself. This might lead to some upside for Apple, but most likely it will lead to massive downside for Amazon.com.
Disclosure: I am short AMZN.