Is Amazon at Risk of an Apple-Like Drop?

Investing

Published: March 19, 2013 4:15 pm

Last Updated: March 20, 2013 6:15 am

The recent drop seen in Apple Inc. (NASDAQ: AAPL) may not have been a shock to many astute investors and it may not be a shock to anyone who has read much market history. That being said, Apple in the last few months chewed up more wealth in raw dollar terms than we have seen in any one company since the recession of late and the dot-com bubble before that. Is Amazon.com Inc. (NASDAQ: AMZN) next?

This matters because there are many similarities between Apple and Amazon even if there are many differences. Amazon shares have pulled back only 10% so far, versus a massive drop of about 40% from peak to trough in Apple.

Apple’s drop was after a huge blow-off rally. Analysts were jumping on board calling for $1,000 and even higher. The law of large numbers sometimes catches up, and that whole gravity issue can be a real pain sometimes. Apple’s rally from trough to peak in the last two-year period was about 100% versus about 75% for Amazon.

Amazon.com is a very expensive stock based upon earnings, while Apple is not. Amazon trades at a whopping 170-times its expected 2013 earnings. Jeff Bezos has sacrificed margin to invest heavily in Amazon’s future customer base and in its infrastructure. Apple now trades at what is barely 10-times earnings, making the relationship between these two tech giants look extreme. Apple’s multiple against expected sales is 2.34, but Amazon only trades at about 1.5-times expected sales. The difference here is margin, with Apple being above 40% and Amazon being barely positive. Amazon remains a story dominated by its fourth calendar quarter. Apple remains a story around new product launches. Amazon still has its star founding CEO, while Apple is without Steve Jobs.

As you can see, there are many contrasts here between Apple and Amazon. We do not want to draw too many parallels simply based upon share price and based solely upon relative rallies and sell-offs. That being said, Amazon’s stock peaked at $284 on two different days in late January and took only about ten trading days to sell off about 10%. The stock has floundered since then and has not been able to hit new highs even as the market rallied to new highs.

Amazon shares closed down 0.5% at $256.41, against a 52-week trading range of $182.88 to $284.72.

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