Apple vs. Amazon: A Tale of Two Valuations

Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN) compete in a few important business areas; Apple’s iPad compares to Amazon’s Kindle in tablet rankings, and both devices come pre-loaded with each company’s respective online media store. But, as technology companies, the metric most often used to compare Apple and Amazon is the valuation of their shares, especially as both companies soared to global prominence under the guiding hand of an innovative leader, late Chief Executive Officer and co-founder Steve Jobs in the case of Apple, and current Chief Executive Officer Jeff Bezos in the case of Amazon.

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While both companies appear to be at the top of their game, despite the increasingly negative sentiment about Apple’s future growth potential, their movement on the stock chart has been quite different. Amazon’s shares have climbed nearly 40 percent in the past 12 months and Apple’s stock has dropped about 30 percent in the same period, prompting many observers to question why their stock prices have diverged so much. But a recent article published by The New York Times cataloged the dangers of such a comparison. The basic premise of the publication’s argument is that growth should not be the only reason for such vastly different valuations.

When the question of stock valuation is put forward, the most common explanation for a divergence is unequal growth. After all, when a company successfully convinces investors that its earnings will continue to increase, an enthusiasm grows around its shares, and, as a result, they tend to perform well on the stock chart. A comparison of growth estimates held by Wall Street analysts for Apple and Amazon in 2014 provides evidence that supports that thinking; forecasts call for Amazon’s earnings next year to be 66 percent higher than those predicted for 2013, and a 10 percent increase is expected for Apple.