SAN FRANCISCO (Reuters) - Apple Inc and Amazon.com Inc will soon battle in the nascent but fast-growing market for electronic books, and Wall Street has ring-side seats.
Both stocks have outperformed in the past year, roughly doubling in value, but which is the better pick for 2010?
Apple, flush with cash and a less lofty valuation than Amazon, may be the wiser choice in the short term as consumers snap up its devices to enjoy all forms of digital media, some analysts and investors say.
But for those with longer investment views, Amazon is showing stronger growth momentum coming out of the recession, as more traditional retail business moves online, others say.
“Apple seems to be the better deal, just purely on valuation,” said Erick Maronak, chief investment officer for the Victory Large Cap Growth Fund, who describes the company led by Chief Executive Steve Jobs as “one of the best-run companies out there.”
Shares of Apple, which has a market value of over $170 billion, are trading at 17 times estimated forward earnings, according to Thomson Reuters I/B/E/S. Amazon, which has a market cap of about $50 billion, is trading at 40 times.
“Apple is cheap. I know people find that hard to believe, but they are,” said Maronak, whose fund has owned Apple shares since 2004 and got into Amazon only last year.
Ted Parrish, who runs the Henssler Equity Fund, echoed that sentiment. ”The main reason that I haven’t warmed up to Amazon is it’s always been pretty pricey,“ he said.”
But for investors looking at growth trajectories Amazon is expected to outpace Apple’s earnings growth in the next 12 months, which could justify the richer valuation.
Amazon’s earnings per share are pegged to increase 40 percent over the next 12 months, according to estimates from Thomson Reuters StarMine, which give more weight to predictions from top-ranked analysts. That compares to Apple’s 23 percent.
Benchmark analyst Frederick Moran likes Amazon, forecasting 30 percent earnings growth for the online retailer in 2010.
“We think as Amazon proves the sustainability of its 30 percent earnings growth rate, it will justify its valuation levels which are obviously higher than other retailers and most Internet companies,” Moran said.
Apple, maker of electronic electronics like iPhones, Macs and iPods, and Amazon, the world’s largest online retailer, have very different business and financial profiles.
But the two companies are about to go head to head in the e-reader market, now dominated by Amazon’s Kindle.
Apple will launch sales of the iPad in late March, a multimedia tablet that will let users play videos and games as well as read books. Jobs has declared his company will stand on Amazon’s shoulders and go a bit further.
For his part, Amazon CEO Jeff Bezos has long held that the Kindle is designed for reading newspapers, magazines and books, and not a stepping stone to a full-featured computing device.
Despite the brewing e-book battle, analysts are extremely bullish on both companies. StarMine data that tracks revision activity from sell-side analysts puts Apple and Amazon high in the 90th percentile range when ranking analyst sentiment.
Both companies have been posting torrid sales growth -- with Amazon revenue rising 42 percent in the December quarter and Apple revenue increasing 32 percent -- and investors like their ability to generate cash.
Apple reported $8.9 billion in free cash flow in fiscal 2009, and Amazon reported $2.9 billion. Apple, which doesn’t buy back stock and makes only small acquisitions, has a stockpile of $40 billion in cash and securities, while Amazon has around $6.4 billion in the bank.
“Excluding $43-a-share in cash and investments, they (Apple) are trading at just 12 to 13 times consensus fiscal 2011 earnings,” said David Dillon, a portfolio manager at HighMark Capital Management which owns Apple but not Amazon.
Amazon’s shares have retreated a little this week, falling some 7 percent after the company lost a pricing battle to top publisher Macmillan, sparking concerns that new rivals like the iPad could erode the Kindle’s dominance and control over the e-book market.
But Hudson Square Research analyst Scott Tilghman argued that Amazon’s upside is longer-term, and its international growth prospects were good. He said Amazon’s recent investments in technology, from website development to digital efforts such as the Kindle, will bring “considerable leverage.”
“Arguably they have similar growth potential, though in Amazon’s case there is considerable leverage in its existing infrastructure,” Tilghman said. “Which is why we think relative valuations (P/E ratios for instance) don’t make sense given the runway ahead of it.”
Reporting by Gabriel Madway and Alexandria Sage, editing by Tiffany Wu