Investing in "Amazon" Without Paying a Premium

This isn't about waiting until Amazon is trading at a more attractive valuation. While that might be an effective strategy, this really isn't about Amazon.

Feb 18, 2014 at 4:00PM

Amazon (NASDAQ:AMZN) and Apple (NASDAQ:AAPL) are constantly making headlines for their innovative ways. This has led to significant stock appreciation for each company over the past three years: 87.66% for Amazon, 57.57% for Apple. 

Most articles you read on these two companies will pertain to new innovations that have the potential to continue to drive stock prices higher. This isn't one of those articles. Instead, we'll compare these two companies by the numbers (for the most part). And there is a catch. 

Paying a discounted price  
Amazon and Apple are two different companies with dissimilar business models. If you want to invest in Amazon (or a company performing similarly to Amazon) without paying a premium, however, then you might want to consider Apple. 

Amazon often finds itself toward the top of the list with anything relating to customer service, which has been a big reasons for the company's consistent top-line growth over the past five years. However, this is one of those very rare cases where another company has shown stronger top-line growth over the same time frame:

AAPL Revenue (TTM) Chart

AAPL Revenue (TTM) data by YCharts

Consider that Amazon and Apple are trading at 606 and 14 times earnings, respectively. Furthermore, Apple offers a dividend yield of 2.40%, whereas Amazon doesn't pay a dividend. This decision now becomes very simple.

When you see one company outperforming the other on the top line for a long time while trading at a more appealing multiple and paying a dividend, that's the company that should be at the top of your investment consideration list or watchlist.

While both companies are highly innovative, which should lead to sustainable revenue growth, Apple knows how to turn consistent profits. The company currently sports a profit margin 21.28%, considerably more impressive than Amazon's profit margin of 0.37%.

Amazon is now considering increasing its annual Amazon Prime membership fee by $20 to $40, up from the current $79 price. If Amazon doesn't increase its membership fee then it will continue to struggle on the bottom line, and Wall Street won't be impressed. If Amazon opts for the $40 increase, it will likely suffer a significant customer backlash. A $20 increase would be the most logical approach, leading to increased profitability while reducing the likelihood of a customer backlash.  

Amazon must also contend with Best Buy (NYSE:BBY), which now uses 400 of its retail stores for ship-from-store purposes. This has sped up delivery and refund speeds for online orders. While Best Buy's new initiative has the potential to steal market share from Amazon over the short term, it's not likely to have a major impact over the long haul. Amazon plans on opening distribution warehouses all over the country, which will lead to expedited deliveries. However, keep an eye on what takes place between these two companies when it comes to shipping speeds. Consumers are more demanding than ever, wanting their products ASAP. Therefore, whoever wins here will have an edge over the other.  

The good news is that when you invest in Apple, you don't have to worry about consistent profitability. This isn't to say that Amazon should be tossed in the junk pile when it comes to investment consideration. It's actually one of the most innovative and fastest growing companies in the world. It's just that when Amazon is compared to Apple, it steps down from its throne. 

The bottom line
Apple offers faster top-line growth over a five-year time frame, a more appealing valuation, and it pays a dividend. Apple is likely to present a better balance of growth potential and resiliency to economic downturns. On the other hand, there is a slight twist.

Over the past year, Amazon has delivered top-line growth of 16.37% versus Apple at just 2.89%. Therefore, Amazon should not be discounted as a potential growth investment; you will just have to accept more risk. Please do your own research prior to making any investment decisions.  

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Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends and Apple. The Motley Fool owns shares of and Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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