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The Globe and Mail

Does Amazon deserve a premium valuation over Apple?

Igor Greenwald is the global editor at

On a day the Dow dropped almost 200, this was no mean feat: shares jumped 4 per cent to a record high above $222 (U.S.) Wednesday, after the e-commerce juggernaut topped revenue and profit expectations.

Amazon reported a profit of $191-million, which was actually down a bit from a year ago. And it's only a mild exaggeration to suggest that it could have posted a wet noodle on the bottom line and the market would still have slurped it up like so much gravy.

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This is not a stock for investors who look at price/earnings ratios before buying. Amazon's p/e based on this year's expected earnings is 89, not that anyone really gives a damn.

No, what has the growth and momentum crowds so excited is the 51 per cent revenue growth rate, proof that Amazon's offensives across several technology and commerce fronts are paying off with top-line gains, if not yet a bottom-line bonanza.

In fact, Amazon might be the most dynamic tech company around. It's riding the cloud computing craze for all it's worth with online storage services for everyone from teenage music lovers to Fortune 500s. Its Kindle e-reader and, soon, Android-based tablet are encroaching on Apple's turf. It's adding streaming content in a potential challenge to Netflix . And, of course, Amazon continues to squeeze bricks-and-mortars rivals like Best Buy , having already pulped Borders and many a neighbourhood bookstore.

And all the while, the company is building out its unmatched distribution network and expanding to promising international markets such as Germany and India.

It's remarkable how aggressively it's investing in the future at a time when many other giants are sitting on their hands and on their cash. The value of Amazon's fixed assets has doubled in a year's time. Its head count is up 53 per cent over that span, to more than 43,000.

And meanwhile, the stock is up 21 per cent in six weeks and more than six-fold from its late 2008 low, which is why Amazon is getting called things like "the most competitive company ever"– the kind of hyperbole that ought to make buyers think twice even if the lofty price seems right.

Then again, as Stocktwits founder Howard Lindzon writes, "you can't over think momentum and Amazon is the poster child of investors over thinking. Amazon CANNOT be valued. Not in a bad way either. If you are short, consider for a moment the possibility that Amazon is where Wal-Mart was in 1991, before its stock got going."

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Now, that comparison comes from a particularly bullish Morgan Stanley analyst who thinks Amazon is in fact a better company than Wal-Mart was the year its stock nearly doubled from a split-adjusted $7.50 a share. Morgan Stanley's new 12-month price target for the stock is $275, up from $245 before the latest results and $225 just a month ago.

While Amazon's revenue this year will surpass Wal-Mart's from 20 years ago and grow faster, its estimated profit of perhaps $1.1-billion will fall short of Wal-Mart's $1.3-billion in 1991. And certainly Wal-Mart was valued at nowhere close to Amazon's present-day $100-billion.

But let's compare apples with Apple, as it were. While Amazon was recently earning its $191-million, Apple was pulling down $6-billion during its most recent quarter. And Apple's revenues grew faster than Amazon's, soaring 83 per cent from a year earlier. Yet its shares are more than six times cheaper than Amazon's based on the current year's earnings estimates, which Amazon might edge but which Apple is highly likely to blow away.

Does Amazon deserve a premium valuation relative to Apple? Arguably, it would be harder to replicate its e-commerce efficiencies of scale than to invent the next Apple-killer of a device. So its economic moat may be higher. But it's hardly six times as high. And its operating margin of 2 per cent is a far cry from Apple's 30 per cent plus.

Investing decisions have to be, in part, about the opportunity cost of picking one stock over another. In Amazon's case, the cost of betting on future returns while Apple is already bearing so much fruit, while growing faster, seems too high.

Amazon's momentum may shield investors from disappointment in the near-term, or maybe even for the next few years, as Mr. Lindzon argues. But the valuation provides little room for error in the event something goes wrong. With stocks like this, something eventually does.

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