Amazon's Apple-Like Growth Is Missing One Element: Rising Profits

Considering the amount of money (NSDQ: AMZN) shareholders have pocketed in recent years, Amazon deserves its spot next to Apple as one of the smartest investments of all time. But Amazon is no Apple (NSDQ: AAPL). And unless something fundamental changes at Amazon, it can’t indefinitely continue to perform like one either.

Investors looked like they were coming to grips with this reality after Amazon wildly missed a profit forecast with its last earnings. Before that late October announcement, Amazon’s share price gains for the year were at about 31 percent, which was slightly more than Apple shareholders were seeing. Amazon’s gain has been cut to about 5 percent, while Apple is still up 19 percent. Stock Chart Stock Chart by YCharts

The nearly 300 percent rise in Amazon’s share value in the past three years goes a long way toward helping investors overlook those recent losses. Going forward, however, Amazon still faces a problem Apple solved years ago: how to turn a lot of sales into a lot of profit. By this measure, Amazon is way off the Apple playbook.

Amazon’s revenues are rising as fast as ever, but its profits have taken a dive this year. Selling products cheaply and offering customers perks like free shipping really cuts into its take-home cash. Revenues TTM Chart Revenues TTM Chart by YCharts

Sacrificing profit margins for sales is a time-honored way of building a great company. Apple, too, saw its profit margins suffer at times when it was launching major new products like the iPod and iPhone. But at Apple, those margin squeezes were temporary blips on an otherwise sustained march to higher profitability. Amazon’s market cap is $87.11 billion, and it’s rare to see such a company, with annual revenues of more than $43 billion, carry on with great sales gains for nearly a decade without an equivalent trend in profitability. Doing both has pushed Apple’s market cap above $360 billion. Operating Margin TTM Chart Operating Margin TTM Chart by YCharts Gross Profit Margin Chart Gross Profit Margin Chart by YCharts

That philosophical difference – Amazon’s decision to continuously grab sales even when gains are costly — shows up in the marketing of it’s latest big product, the iPad competitor called Kindle Fire. Apple gets about a 50 percent profit on the sale of every iPad, according to industry reports. Amazon is believed to lose a few dollars on each Kindle Fire sale. Sales of other Amazon products cover those losses for now, and the discounting has helped Amazon take a huge bite out of Apple’s iPad sales. Amazon investors are betting that Amazon’s ability to out-sell competitors like Apple in dozens of products and services, including movie rentals and other electronics, will eventually translate into a huge boost in Amazon’s profits.

But oh, what a bet this is. Amazon shares trade at more than 100 times earnings now, a triple-digit P/E that only a handful of large cap companies share. The number implies expectations of big profit gains in the not-too-distant future, even though Amazon reports making less money per sale recently, not more. Ostensibly, that trend will reverse in a radical way.

By comparison, Apple, which has roughly the same revenue growth rate as Amazon, as well as earnings that jumped rather than fell this year, trades at a P/E of 14.20. YCharts Pro gives both companies strong marks for fundamentals.

Is it smart to sell 4 million Kindle Fires at a $12 million loss? It is if you believe that making the product popular now will enable Amazon to raise the price, cut its costs, or just sell so many accessories for the Kindle Fire that overall profits from future sales will far outstrip those losses. And it’s the kind of logic that has kept Amazon investors quite happy for some time now. But if that math doesn’t make much sense to you, the $1 billion profit on an equal number of iPads might be more attractive.

Dee Gill is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings and portfolio strategies.

This article originally appeared in YCharts.