Earnings season has arrived, providing fresh batches of figures to consider when expanding your portfolio.
Two of the major companies releasing results last week were Apple (NASDAQ: AAPL) and Amazon (NASDAQ: AMZN). Both have built immense brand loyalty with consumers and boast powerful positions in retail. Apple has almost unrivaled supremacy in consumer tech products. Amazon has similar dominance in e-commerce and the cloud market.
Since 2019, Apple has soared by 349% and Amazon by 96%. While past growth is no guarantee of what’s to come, these companies have solid long-term outlooks as they continue to expand in their respective industries. Meanwhile, Apple and Amazon both beat Wall Street forecasts for earnings per share and revenue in their most recent quarters.
But is Apple or Amazon the better stock to buy right now?
Apple
Apple is coming out of a tricky year. Macroeconomic headwinds caught up with the company in its fiscal 2023 (which ended Sept. 30, 2023), and revenue dipped by 3%. However, the results from its fiscal 2024 first quarter (which ended Dec. 31, 2023) showed signs that a recovery could be underway.
During the quarter, Apple’s net sales rose 2% year over year to $120 billion, beating analysts’ expectations by more than $1 billion and breaking a streak of four consecutive quarters of revenue declines. Meanwhile, its earnings hit $2.18 per share compared to an expected $2.10 per share.
Yet, outperforming estimates wasn’t enough to quell investor concern over its iPhone business. Smartphone sales increased 6% in Q1 2024, yet fell 13% in China. That country has increased restrictions on the iPhone, threatening sales in one of Apple’s most crucial markets. China accounts for about 17% of its product sales.
As a result, Apple’s stock fell nearly 4% in after-hours trading following its earnings release on Feb. 1.
However, recent challenges are why keeping a long-term perspective with proven growth stocks like Apple is crucial. The company has a highly lucrative digital services business and is investing heavily in expanding markets like artificial intelligence (AI).
Additionally, the tech firm hit nearly $100 billion in free cash flow last year. It has the funds to overcome current headwinds and continue investing in its business.
Amazon
Wall Street seemed to have the opposite reaction to Amazon’s earnings release. The e-commerce giant’s shares rose by nearly 10% after it posted its Q4 2023 results on Feb. 1.
During the quarter, Amazon’s revenue grew 14% year over year to $170 billion, outperforming the consensus forecast by close to $4 billion. Meanwhile, its earnings per share came to $1, compared to an expected $0.80.
Much of Amazon’s stellar growth came from its e-commerce business. Its North American segment posted operating income exceeding $6 billion, significantly improving on the $240 million in losses reported in the year-ago quarter.
Amazon’s Q4 was a fitting end to a stellar year of growth. After suffering steep declines in 2022 as spikes in inflation curbed consumer discretionary spending, the company pulled off an impressive turnaround.
As a result, Amazon’s stock is up 63% year over year, compared to a 28% rise in Apple’s share price. During the same period, Amazon’s free cash flow soared by 427% to $17 billion. Apple’s total free cash flow is higher, but declined by just over 1% over the last 12 months.
Amazon is on a promising growth trajectory, with solid retail growth and a highly profitable cloud business.
Determining the Best Investment
Comparing these firms’ forward price-to-earnings ratios (P/E), Apple’s 28 against Amazon’s 48 makes the iPhone company’s stock look like a far better value. Forward P/E is a valuation metric calculated by dividing a company’s share price by its estimated future earnings per share. The lower the figure, generally, the better the value.
However, the chart below shows their valuations are more complex than that.
Data by YCharts.
This chart shows Apple’s earnings could hit nearly $8 per share over the next two fiscal years, and Amazon’s might reach just under $7 per share. Multiplying these figures by the companies’ forward P/E ratios yields stock prices of $218 for Apple and $317 for Amazon.
Based on their current positions, these projections would see Apple’s stock price rise 17% by fiscal 2026, while Amazon shares would increase by 84%.
As a result, Amazon’s stock is a no-brainer in a decision between these two companies. The tech giant is on a growth path too good to ignore, making it the better stock to buy right now.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Dani Cook has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Apple. The Motley Fool has a disclosure policy.
