Okay, so your Apple stock's broken
You sit around mopin'
Cryin' and cryin'
You say you`re even thinkin' about dyin'?
Well, before you rag on Amazon, dig this
Adapted from "Everybody Plays The Fool"
With apologies to The Main Ingredient
I'm worried about a few of you Apple bulls out there. You've got Amazon PE envy. You know you have it if you're miffed, angry, or even hurt that Apple (AAPL) trades with a PE below 14 while Amazon (AMZN) sports one of 170+.
If a PE ratio were somehow the equivalent of an IQ, Amazon would be the Einstein of stocks with Apple barely a sentient being.
As an Apple shareholder, however, I find it comforting that AAPL's PE isn't low, it's just, well, kind of compressed. A Forbes article written a few weeks ago describes this phenomenon:
This is called "compression," and you hear Apple investors complaining about it all the time. They like to contrast Apple's P/E ratio to Amazon's .
Apple's revenues grew nearly twice as fast as Amazon's last year. But Apple's stock is trading this week at less than 14.3 times earnings. If it were trading, as Amazon does, at 190 times earnings, it would be selling for more than $7,800 a share.
But comparing any stock with Amazon buys you nothing but heartache.
Heartache? No need for that. As The Main Ingredient might have observed so many years ago:
Everybody plays the fool, sometime
There's no exception to the rule
Listen, baby, it may be factual, may be cruel
But I ain't lyin', everybody plays the fool
* * *
It's really pretty easy to understand how AMZN shareholders view their stock.
One sentence explains it all. Ready for it? Here it is…
The PE doesn't matter.
Nope. Doesn't matter at all. You can ignore it because the ratio of this stock's price to its earnings per share is completely irrelevant.
Easy isn't it. Sure it sounds like blasphemy, but stop and think. Why should everyone judge every stock by just one ratio?
I think it's pretty clear everyone doesn't do this. If they did, why would AMZN's institutional ownership be 68%? Are they playin' the fool? Or are they an exception to the rule?
After all, you can see that Amazon's PE has been exploding at the same time Apple's has been getting stomped on.
So if the PE ratio is irrelevant, what metrics might Amazon longs actually be watching? One might be the P/S - or price-to-sales ratio.
Sure, Amazon may have one of the highest PE ratios among large-cap companies, but based on its P/S ratio, Amazon is actually cheaper than Apple.
I know what you're thinking. It's earnings that count, right? Well sure they do - when and if there are actually enough earnings to matter. But right now, Amazon is still in its growth phase. Or at least the company's leadership thinks it is.
Amazon has certainly been a disruptive force in retail commerce. Ask anyone who used to own a small bookstore. There's a chance they could become even more disruptive. Besides, Amazon is using its own cash flow to fund this growth. It's not like the company's in debt or anything.
Take a look at revenues and earnings for both Apple and Amazon. I put a handy little inset into the Amazon chart because earnings don't even register on the larger chart above it.
So how does Amazon begin to get that earnings line to stop flatlining and start a rapid ascent like Apple's been doing?
One interesting view comes from CFA Anand Chokkavelu in a video you can watch here from The Motley Fool. He compares Amazon to Wal-Mart (WMT) and suggests that investors are looking for similar performance from Amazon -- at some point, anyway.
Here's a chart I made that I think makes Anand's point. It shows earnings and revenues for both companies.
On a trailing 12-month basis, Wal-Mart earned $16 billion on $455 billion in revenue while Amazon earned $0.6 billion on $54 billion in revenue.
What if Amazon grew to be just 25% the size of Wal-Mart, but earned a similar margin?
Well then you'd be talking about Amazon earning about $8.80 per share. So you'd find that either Amazon would shoot up to $1,500 or (far more likely), its PE ratio would start having compression problems of its own.
As Amazon moves beyond selling physical books (and Kindle books, of course) into selling more general merchandise, it's not beyond the realm of possibility.
Of course Amazon faces some challenges. That growth story may not play out. Amazon may lose its sales tax-advantaged status in many states. Or it could totally screw up in some other way entirely.
As I mentioned, I own Apple and sleep fine. I'm not sure I'd sleep just as fine owning Amazon. But that doesn't make Amazon an irrational investment. In fact, you could do worse. For example, I've always been way more wary of Netflix and its growth story than I've ever been on Amazon.
So fellow Apple bulls, there's no reason to fret about PE ratios. No need for PE envy. If Amazon is not successful, its PE ratio truly doesn't matter. If they are successful, its PE ratio will eventually get compressed, too. I guarantee it.
Or as the song "Everybody Plays The Fool" goes, "And now you cry but when you do, Next time around someone cries for you."
Disclosure: I am long AAPL.