The stock market does not always make a lot of sense, especially over the short-term. Stock price changes occur for silly reasons a lot of times, whether a news event around the world, or the comments of a TV personality. I think perhaps the most instructive lesson comes from the fictional movie Wall Street where you can hear the financial news on a TV in the background explaining what happened with Blue Star Airlines stock, which, of course, is not at all what happened.
However, over the long-term, the stock market tends to shake off the manufactured volatility from trading programs and over/under reaction to news and eventually move stocks in the general vicinity of where they should actually be priced. This can take a very long time; witness the completely irrational internet bubble of the late 90s, which lasted years. What makes trading stocks so tricky is that it doesn’t matter if you are right. All that matters is what everyone else thinks is right.
Amazon vs Apple Earnings and Stock Prices
One of the latest head scratchers that has everyone talking is what happened with Amazon’s stock price and Apple’s stock price following their earnings announcements and press conferences. A lot of analysts are looking deeply at the numbers, but in this case, they have nothing to do with what is going on with these stock prices over the short-term.
Apple and Amazon are both very famous companies. They are also both glamorous technology companies. People love to invest in companies like these. They like to think things like, “Everyone has an iPhone; I should invest in the stock,” or “Amazon is into everything and driving other companies out of business; I should invest in the stock.” These are not necessarily the right reasons to invest, but that doesn’t mean they are not common.
What is a Apple Stock Really Worth?
One of the hardest things for amateur investors to understand is that theoretically, everything that is already known is accounted for in the price of the stock. For example, investors already know that Apple has sold a lot of iPhones. They also already know how much money the company has and how good it is at producing new products. If the market were exactly right, then the $450ish stock price Apple currently has would be the approximate value of those things. In other words, thinking you should buy Apple because even your grandma has an iPhone is not a good reason to invest.
Let’s try this another way. McDonald’s has restaurants virtually everywhere. I read somewhere that there are only two countries on Earth without a McDonalds. That’s probably better coverage than Apple. So, following the above logic, you should invest in McDonalds too, right?
Of course, that logic doesn’t follow, because McDonalds stock price already accounts for its global penetration.
What is Amazon’s Stock Really Worth?
Likewise, just because Amazon is in a lot of different businesses, and just because it is driving electronics retailers like Circuit City out of business doesn’t mean that you should invest in its stock. Again, this is all, theoretically taken account of within its stock price.
Amazon Profits vs Apple Profits
One of the things that has people shaking their heads is that one company reported profits that were higher than expected and another reported lower profits. In fact, the former company reported huge profits, the latter actually reported an overall loss. One company’s stock price went up and one company’s went down, but it isn’t what you expect.
Apple is hugely profitable and everyone expects it will continue to be. Amazon lost money for the year and everyone continues to expect it will have very low profits. So, why did Amazon’s stock go up and Apple’s stock go down?
Analysts are saying that Apple’s stock price dropped because the company suggested that it won’t keep growing as fast as it has forever. In fact, it expects growth to slow a bit as soon as next quarter. As I have mentioned here before, Apple’s stock may have been priced to perfection, meaning that ANY perceived bump was going to cause a downturn. That may have been what happened here. There may also be some concern that without Steve Jobs, Apple won’t be as good.
But the real reason might just be that stocks don’t just go straight up. Market watchers expect that stocks will pause or take a break as investors cash out a winning position, even as long-term investors will continue to hold the stock. The price of the stock will drop or tread water while waiting for a new wave of investors who believe the price will go higher.
More curious, however, is what is happening with Amazon’s stock price. It’s profits are terrible. The company has expenses that rival Apple’s, with none of the profit. It pays no dividends. One of its major competitive advantages (not charging sales tax) is going away in big markets like California and Texas. In other words, there is little to explain Amazon’s stock price rise.
Usually, the idea behind a company with these kinds of fundamentals is that it will experience huge growth and that eventually the profits will catch up. However, Amazon is not a new company. It has already had huge growth. What it has never had is profits. There is really no reason for the company’s stock to be doing so well.
So, what do investors say about Amazon that justifies continuing to invest despite virtually no growth to the bottom-line? As it turns out, most people and analysts know about the terrible fundamentals. Their justification is that Amazon is different.
If you’ve been in finance at least since the internet bubble, that last sentence should send chills up your spine. While the bubble was expanding and everyone was shaking their heads, and shrugging their shoulders investors, both professional and otherwise, were repeating the same mantra that this time it was different. It wasn’t different then, and it isn’t different now. There is a limit to how long Amazon can hide its performance behind a story of, “just wait.” When that time runs out, expect a nasty fall.
I don’t own shares of either of these stocks, although with Apple’s dividend yield approaching 2.5%, that may change. This article is for general information only. Nothing here should be considered an offer to buy or sell securities. Nothing here should be considered a recommendation to buy or sell shares of either stock. Consult your own professionals for specific advice.