The first thing that can be said about Amazon and Apple is that both have made the cut into Warren Buffett’s portfolio. That’s high praise to be selected by the man generally regarded as the world’s best investor, but it doesn’t reveal the full picture.
Buffett owns 10.4 million shares of Amazon versus 915 million shares of Apple, quite the differential. It’s even more revealing when you see the percentage each holds in his Berkshire Hathaway portfolio. Amazon represents just 0.4% of his equity holdings while Apple commands an astonishing 51.0% of his entire stock portfolio.
In a who’s who battle between Amazon vs Apple stock, Buffett has made his bet clear that Apple is the superior company, but is he right?
Apple Has An Impenetrable Moat
To understand why the Oracle of Omaha bet so heavily on Apple, you need to dig deep to understand the company’s moat.
One aspect of a company that reveals its moat is pricing power, and Apple has that in spades. Remember when a $100 phone was the norm, well now a $100 increase in the price of a phone is more normal because Apple made it commonplace to launch $1,000+ phones into the marketplace.
Famously, Buffett commented that Apple has enormous pricing power, a fact that can be revealed by asking consumers one question: how much money would could I pay you to give up your iPhone permanently?
For many people, of course, there is no price, and that alone reveals the stranglehold Apple has on consumers’ mindsets. They simply will not give up the product, which is essential to daily life. Whether going through an airport, paying your local barista for a coffee, or navigating through town using a maps application, Apple’s phone is the foundation for so much of day-to-day living.
And yet Apple’s phone sales represent just a portion of its revenues. Sure phone sales still dominate the P&L statement but Mac, iPad, Wearables, and Services all combine to produce astonishingly high sales that last quarter were clocked at $81.7 billion, a 1.4% decline over the prior year’s quarter.
But a sales stumble this year hasn’t dented operating income, which continues to be a thing of beauty. EBIT, or operating income, is up from $66 billion in 2020 to $119 billion in 2022. Few companies, apart from Buffett’s own Berkshire, come close to posting numbers in this ballpark.
With an impenetrable moat, a fortress balance sheet, and pristine profits, Apple remains a compelling buy for any investor looking for a long-term hold that can be trusted to deliver.
Amazon Revenues Are 2x Apple’s
As impressive as Apple’s top line sales are, Amazon remarkably eclipses them. In its most recent quarter, Amazon reported sales of $134 billion but the devil is truly in the details when it comes to comparing Apple and Amazon.
Where Apple drops a significant portion of its revenues to the bottom line, Amazon fails to do so. It posted operating income of “just” $7.6 billion. By comparison, in the same quarter Apple recorded sales of $81.7 billion, so about 30% lower, but managed to report operating income 3x higher, at $22.7 billion.
Those kinds of numbers show that Apple is operationally much more efficient than Amazon. It can generate 30% lower sales but post operating income that is 200% higher.
The slim margins nature of Amazon’s e-commerce business means that lots of bites of the apple so to speak are taken along the way. Whether it’s the cost of paying suppliers or warehousing, or delivery, the margins just don’t look nearly as good for Amazon as they do for Apple. And Wall Street pays a premium for higher margins. It’s why Apple’s market capitalization sits at $2.7 billion versus Amazon’s which is about half as large at $1.4 billion.
Could A Bite Be Taken Out Of Apple Share Price?
On a valuation basis, however, Apple appears to be priced to perfection. 43 analysts cover Apple, and their consensus rating is for the share price to reach fair value of $201.46.
Our own numbers suggest a bit more pessimism because we calculated fair value at $165 based on a discounted cash flow forecast analysis.
Apple is also trading at a really high price-to-earnings ratio right now of 29.3x. As a reminder, when Buffett snapped up shares of Apple the P/E ratio was closer to 10x so significant multiple expansion has occurred.
Seasonally, Apple tends to have a weak September, but as anticipation for the holiday season ramps up, the share price tends to resume the bullish trend it has favored for many years now.
Is Amazon A Good Buy Now?
Examining Amazon through the same valuation lens would suggest it is the better buy at this time. Of the 50 analysts who cover Amazon, the average target price for AMZN is $168.67, representing 22% upside.
We’re also more conservative than the Street on Amazon’s upside potential but we calculate 10.0% upside to fair value of $152 per share.
On both counts, Wall Street and a discounted cash flow forecast analysis, Amazon is more attractive as a Buy at this time.
And unlike Apple, Amazon doesn’t tend to have the seasonal dip that Apple suffers from post Labor Day. However, it does enjoy a seasonal run also into the end of the year as consumer sales are forecast to pop for the holidays.
Amazon Vs Apple Stock: The Bottom Line
Both Amazon and Apple are smart additions to your portfolio, but if you must choose one, Amazon has a slight edge on a valuation basis now.
Apple is attractive because of its impenetrable moat and arguably superior business model that is more efficient and more profitable. But Amazon looks better by Wall Street analysts estimates as well as a forecast of cash flows discounted to present day.
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