How to Play the Death of Paper

By Mohamed Mounir - May 10, 2012 | Tickers: AMZN, AAPL | 0 Comments

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When it comes to the Tablet Revolution and the death of paper, two companies come to mind Apple (NASDAQ: AAPL) and Amazon (NASDAQ: AMZN). Now which company should you invest in? Well let’s take a closer look at each of them:

Now from the above data, I put my money on Apple. Everything that Amazon has going for it Apple has and then some!!!

It is easy to see from the valuation ratios which company is more likely to be overvalued. Amazon needs to start getting extraordinary results to deserve a P/E Ratio of 180. Apple already achieves incredible results and is much cheaper.

Apple is also a much better run business than Amazon at the moment. One could easily see that from the margins comparison and the Return on Assets and Equity. Even if we disregard Amazon’s expenditures as temporary expansion phase expenditures, Apple has a Gross Profit Margin which is almost twice as large as Amazon’s.  

Don’t forget that Apple also makes money on every ipad it sells. Amazon loses money on every kindle it sells. That would be okay if Apple’s ipad was a niche market and the Amazon kindle was dominant. However this is not the case, the ipad is by far and large the big boy on the field with over 15 million units sold in the 3 months ending 31st Dec 2011 and almost 12 million units sold in the 3 months ending 31st March 2012. Amazon doesn’t release hard numbers on how many kindles it sold in a specific period, but it is expected to be less than the ipad.

When it comes to growth both companies are expected to do really well. However Apple is making some serious money and achieving growth rates characteristic of a small cap company. Many people believe that Amazon will generate more revenues than Wal-Mart someday in the future. Now that may or may not happen, but when it comes to retail Apple has already surpassed everybody else in another metric, “Sales per Square foot”. Apple generates $5600 per sq foot compared to $2900 psqf of Tiffany & co in second place.

Apple is also going to expand its flagship stores rapidly in the coming years. Consider this, how many Apple stores are there in China, India, Brazil, and Indonesia, four countries with a combined population of 2.8 billion which is roughly 40% of the world’s total population. The answer is five; 5 in china, 0 in India, 0 in Brazil, and 0 in Indonesia.  In fact Apple so far has stores in only 13 countries and even though Apple products already sell well in places where there is no Apple store in place, there is nothing like a Flagship Store opening to drive up sales of Apple products.

The only place that the Amazon kindle has an edge is eBook sales with an estimated 60-70% Market Share. This is not hard to imagine as Amazon’s beginnings were as an online book seller website. However you can expect that the ibook store will compete in this area by at least grabbing a piece of the market if not dominating it due to the very large amount of ipads sold.

Foolish Bottlom line

I believe that if you were to choose between these two tablet makers, you should go with Apple and skip Amazon. I believe that Amazon is a great company with a promising future ahead; however at a P/E ratio of 180, I think it is too overvalued at this stage and it brings back too many memories of the dot com bubble. I think much of its growth is already priced in at the current price. I would tend to avoid Amazon unless something drastic happens in its bottom line and EPS.  On the other hand I would invest with confidence in Apple.

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