Apple vs. Amazon

Includes: AAPL, AMZN
by: Mark Krieger

Both AAPL and AMZN have seen staggering runs lately. AAPL’s 21% rise in a little less than a month and AMZN’s 30% catapult are hard to believe, but have the fundamentals changed that much in such a short period?

AMZN’s 2011 earnings estimates are the same today as they were a month ago. So why would Mr. Market be willing to pay so much more today than last month? Answer: Change of perception and market sentiment. The price change is just a recipe of momentum, fueled by momentum and short covering partly caused by overzealous analysts trying to make a name for themselves. Chasing either of these stocks at these levels could be dangerous to your health, because expectations are just getting way too preposterous.

Friday’s action unsustainable: Last Friday, the combination of Piper Jaffray raising its target price to $198 along with a massive 2% rise in the overall market put AMZN in orbit, as it gained $7.88 (5.16%) to close at a new all time high. If you think about it, the stock added more in one day than the entire company will earn in the next 730 days combined. This is pure lunacy, and reminds me about the wisdom of being fearful when others are greedy. Has everyone already forgotten the Dotcom Boom?

You have to pay for earnings growth: I realize that companies with superior earnings growth command a higher multiple. AMZN is expected to see its earnings increase 37% from $2.58 to $3.54 in 2011 and currently sells at 45 times those estimates. AAPL on the other hand, is forecasted to lag in earnings growth, with its 2011 earnings slated to grow only 22% from $14.45 to $17.68, producing a 17 forward multiple. If you calculate the difference in growth rates between the two, AMZN’s growth rate ends up being 68% higher, yet AMZN’s multiple is nearly three times greater. “Houston”, we have a problem here. All things being equal, AMZN’s multiple should be only 68% higher (the same as its growth rate delta) which approximates 29, not 45. At 29 times its 2011 estimates of $3.54, the stock should be closer to $103 than its latest quote of $161.

Bottom line: Dump AMZN and buy AAPL after a 10% correction,

Disclosure: Short AMZN and AAPL