Apple (AAPL, Financial) and Amazon (AMZN, Financial) are two great companies. Both companies produce huge amounts of free cash flow, have great balance sheets and have had great stock performance over the last half decade.
But until I did a bit of research, I did not realize how much more prolific Apple has been than Amazon and just how much more attractive its valuation is.
Apple has been just incredible over the past five years. Check out the graph below which shows the amazing growth in Apple’s annual cash flow:
When a company grows cash flow like that, good things have to happen to its stock price and for Apple that is exactly what has happened:
The recipe for success that has benefitted Apple shareholders has also worked for Amazon shareholders. Step one of that recipe is to grow cash flow which is exactly what Amazon has done:
Step two of that recipe is sit back and relax as the growth in cash flow does good things for Amazon’s share price:
Both the Amazon and Apple cash flow charts and the Amazon and Apple stock price charts look remarkably similar. The charts all show a long steady march up and to the right.
However if you put the two charts together on the same scale, it becomes very apparent that one company is a much more prodigious generator of cash flow than the other.
It isn’t even close. Apple is generating annual cash flow that is multiples of what Amazon generates. Considering that staggering difference, the valuation of these two companies by the stock market seems much too similar.
Apple
Shares outstanding – 939 million
Share Price - $450
Market Cap - $422 billion
Less Net Cash/Securities as of Last Quarter[b]End[/b]Dec. 29, 2012 - $130 billion
Enterprise Value - $290 billion
Amazon
Shares outstanding – 453 million
Share Price - $260
Market Cap - $117 billion
Less Net Cash/Securities as of Last QuarterEndDec. 31, 2012 - $8 billion
Enterprise Value - $99 billion
In the last fiscal year Apple generated over $50 billion in cash flow. Amazon on the other hand in its last fiscal year generated $4 billion.
Apple generated 12 times the amount of cash that Amazon did, yet its enterprise value of $290 billion is only three times Amazon’s enterprise value of $100 billion.
Are Amazon’s growth prospects really that much better than Apple’s?
On a multiple of cash flow basis the numbers look like this:
Apple - $290 billion / $50 billion = 5.8 times cash flow
Amazon - $99 billion / $4 billion = 25 times cash flow
Amazon’s cash flow is valued at four times what Apple’s cash flow is.
To really put things into perspective I’d like to share one final statistic. In Apple’s last quarter the company generated $23 billion of cash. In the last ten years, Amazon has generated $20 billion.
I think going long Apple and short Amazon is a trade I would take. And it isn't because I love Apple as an investment, it is because I think Amazon is overvalued.
Over the past three years Amazon has grown cash flow from operations by the following percentages:
2010 - 6.13%
2011 - 11.67%
2012 - 7.10%
That is an average over the three years of 8.3%.
If that rate of growth were to continue for the next three years Amazon's cash flow from operations would look like this:
2013 - $4.5 billion
2014 - $4.9 billion
2015 - $5.3 billion
If Amazon's stock price were to stay completely flat for the next three years (a very disappointing result) Amazon's price to cash flow multiple at that point in time would be:
Enterprise Value - $99 billion
Cash Flow - $5.3 billion
Multiple - 18.67 times
My point being that even with continued growth in cash flow of 8.3% per year and a flat stock price Amazon still doesn't look cheap.
There is a lot of risk involved in holding shares in a company like Amazon with such a rich valuation. For the shares of Amazon to keep going up the company must keep growing AND the premium valuation multiple must continue.
Apple is growing faster than Amazon and is valued at a quarter the multiple. I have my reservations about Apple's rate of growth continuing, but since there is no growth priced into the stock it isn't as big of a concern.
Amazon on the other hand is priced as though many, many years of growth are ahead of it. Any blip in performance and Amazon's share price could be cut in half pretty quickly.
The source of all numbers in this article are the various 10K and 10Q filings of Apple and Amazon that can be found through the two links below:
Apple 10-ks
http://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0000320193&-k&dateb=&owner=exclude&count=40
Amazon 10-ks
http://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0001018724&-k&dateb=&owner=exclude&count=40
But until I did a bit of research, I did not realize how much more prolific Apple has been than Amazon and just how much more attractive its valuation is.
Apple has been just incredible over the past five years. Check out the graph below which shows the amazing growth in Apple’s annual cash flow:
When a company grows cash flow like that, good things have to happen to its stock price and for Apple that is exactly what has happened:
The recipe for success that has benefitted Apple shareholders has also worked for Amazon shareholders. Step one of that recipe is to grow cash flow which is exactly what Amazon has done:
Step two of that recipe is sit back and relax as the growth in cash flow does good things for Amazon’s share price:
Both the Amazon and Apple cash flow charts and the Amazon and Apple stock price charts look remarkably similar. The charts all show a long steady march up and to the right.
However if you put the two charts together on the same scale, it becomes very apparent that one company is a much more prodigious generator of cash flow than the other.
It isn’t even close. Apple is generating annual cash flow that is multiples of what Amazon generates. Considering that staggering difference, the valuation of these two companies by the stock market seems much too similar.
Apple
Shares outstanding – 939 million
Share Price - $450
Market Cap - $422 billion
Less Net Cash/Securities as of Last Quarter[b]End[/b]Dec. 29, 2012 - $130 billion
Enterprise Value - $290 billion
Amazon
Shares outstanding – 453 million
Share Price - $260
Market Cap - $117 billion
Less Net Cash/Securities as of Last QuarterEndDec. 31, 2012 - $8 billion
Enterprise Value - $99 billion
In the last fiscal year Apple generated over $50 billion in cash flow. Amazon on the other hand in its last fiscal year generated $4 billion.
Apple generated 12 times the amount of cash that Amazon did, yet its enterprise value of $290 billion is only three times Amazon’s enterprise value of $100 billion.
Are Amazon’s growth prospects really that much better than Apple’s?
On a multiple of cash flow basis the numbers look like this:
Apple - $290 billion / $50 billion = 5.8 times cash flow
Amazon - $99 billion / $4 billion = 25 times cash flow
Amazon’s cash flow is valued at four times what Apple’s cash flow is.
To really put things into perspective I’d like to share one final statistic. In Apple’s last quarter the company generated $23 billion of cash. In the last ten years, Amazon has generated $20 billion.
| Year | Amazon Cash Flow |
| 2012 | 4,180 |
| 2011 | 3,903 |
| 2010 | 3,495 |
| 2009 | 3,293 |
| 2008 | 1,697 |
| 2007 | 1,405 |
| 2006 | 702 |
| 2005 | 703 |
| 2004 | 566 |
| 2003 | 392 |
| 20,336 |
I think going long Apple and short Amazon is a trade I would take. And it isn't because I love Apple as an investment, it is because I think Amazon is overvalued.
Over the past three years Amazon has grown cash flow from operations by the following percentages:
2010 - 6.13%
2011 - 11.67%
2012 - 7.10%
That is an average over the three years of 8.3%.
If that rate of growth were to continue for the next three years Amazon's cash flow from operations would look like this:
2013 - $4.5 billion
2014 - $4.9 billion
2015 - $5.3 billion
If Amazon's stock price were to stay completely flat for the next three years (a very disappointing result) Amazon's price to cash flow multiple at that point in time would be:
Enterprise Value - $99 billion
Cash Flow - $5.3 billion
Multiple - 18.67 times
My point being that even with continued growth in cash flow of 8.3% per year and a flat stock price Amazon still doesn't look cheap.
There is a lot of risk involved in holding shares in a company like Amazon with such a rich valuation. For the shares of Amazon to keep going up the company must keep growing AND the premium valuation multiple must continue.
Apple is growing faster than Amazon and is valued at a quarter the multiple. I have my reservations about Apple's rate of growth continuing, but since there is no growth priced into the stock it isn't as big of a concern.
Amazon on the other hand is priced as though many, many years of growth are ahead of it. Any blip in performance and Amazon's share price could be cut in half pretty quickly.
The source of all numbers in this article are the various 10K and 10Q filings of Apple and Amazon that can be found through the two links below:
Apple 10-ks
http://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0000320193&-k&dateb=&owner=exclude&count=40
Amazon 10-ks
http://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0001018724&-k&dateb=&owner=exclude&count=40
