12/9/12

Amazon ($AMZN) vs Apple (AAPL), Which Is More Sustainable?

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Today I started reflecting on Amazon and Apple. Ive been shopping on both
of their websites as Christmas inches closer and I started thinking about

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how difficult Amazon is to value. Much like LinkedIn (LNKD), its a

company and a business model that I love but that I find very difficult to put

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in context. They both seem very expensive on the surface but have
incredible growth potential. Back to Amazon and Apple. One company

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Dec 06, 2012 | About: AAPL -2.56%

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nabeel fazal

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Amazon ($AMZN) Vs Apple (AAPL), Which Is

More Sustainable?
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has sky-high margins, is piling money like theres no tomorrow and

focused on a few key products. The other one is doing almost
exactly the opposite. Its fascinating and I thought Id take a deeper look..
Id love to get your thoughts:

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Apple Model
The Apple model is much more similar to what were used to. After turning the company around,
Steve Jobs gave a clear vision by working on a handful of key products that were significantly
superior to alternatives in every possible way (design, ease of use, experience, etc). That helped
Apple build an incredible brand, an army of fans that continues to be impressed by the
latest releases. Apple could virtually launch any type of product and have a huge
success no matter how it is priced, etc.

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The big downside though is that it could change over time, especially if Apple ends up
releasing a product that lacks its usual quality. The recent Apple maps fiasco in the latest iOs
was one such example. Get a few more like those and you could see a major shift.

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I do think that the Apple model is fairly easy to evaluate. You have a company that
generates $X, growing at X%. You can then compare the P/E ratio to other competitors which
has personally led me to become a major believer in the stock in recent months.

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Amazon ($AMZN) vs Apple (AAPL), Which Is More Sustainable?

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Amazon model
Amazon is a very different model by comparison. It started off in the physical book
business and gradually became dominant. At that point it started moving to other industries
selling different products through its main brand but also sub-brands such as Zappos.com,
Diapers.com, etc. All of those have given Amazon a dominant position in much of the ecommerce
business.

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What Happened Next?

After taking a strong position in the physical book market, Amazon was able to slowly but
surely take down most national bookstores such as Barnes & Nobles. It then moved to
ebooks, a market that Amazon completely dominates. The company continues to face off

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and win in many different spaces for cloths, books (now even getting into book
publishing), video, cloud computing, it now also competes with Netflix, is getting into
local shopping, etc.

How Amazon Destroys Competition

There are numerous examples where Amazon is more than willing to sell at no profit or even at a
loss. Why?
-To establish itself as a low cost leader
-To destroy competitors such as Barnes and Nobles, Best Buy, etc
-Because it can..
One such example is the Kindle which Jeff Bezos has admitted not even trying to make a profit on.
Then Netflix has accused Amazon of losing $1B/year on its video streaming service. Amazon also
ships a lot of its merchandise at a loss. Who knows what else Amazon is losing money on. What
does seem clear is that it is driving many competitors out of business which could mean higher
margins in the future.

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Amazon ($AMZN) vs Apple (AAPL), Which Is More Sustainable?

In The Meantime
I struggle valuing Amazon because its EPS is basically meaningless. As long as Amazon
keeps pumping money into losing businesses to destroy competition and increase its
capabilities, market share, etc. EPS will remain somewhat irrelevant. What is important is:
-Will Amazon start focusing on earnings per share at some point and what would happen if
that was the case?
I guess no one has the answer to that question but clearly many including myself think it will happen
at some point. If we didnt, Amazon (AMZN) would be an obvious short at its current valuation

Which is most sustainable, Apple or Amazon? How do you personally value

Amazon?
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