Comparing Apples to Oranges: Apple Inc. (AAPL) vs Amazon.com, Inc. (AMZN)

Life isn’t fair. We all have to accept that. The stock market is fickle and rewards companies on what it thinks the future will bring, regardless of what the company has done in the past in many cases. An excellent example of this is Apple Inc. (NASDAQ:AAPL) compared and contrasted to Amazon.com, Inc. (NASDAQ:AMZN). Over the past 3 months, the two stocks have gone in opposite directions with Apple falling about 25% from its high and Amazon soaring to new highs.

Mr. Market in essence is assuming negative growth from Apple Inc. (NASDAQ:AAPL) in the future and explosive growth from Amazon. Apple is being seen as not bringing any new products to markets, ever, while Amazon is seeing as exploiting every single strength it has with ever-expanding margins and growth into new markets. I would be very skeptical about those assumptions. Let’s look at what to expect in the future for both these companies.

EPS growth at Apple Inc. (NASDAQ:AAPL) was flat from a year ago and would have grown some if the time periods in each quarter had been equal. Its EPS growth is expected to be flat or to grow in the single digits under the best of conditions if no new products are introduced. EPS growth at Amazon is expected to take off in the next few years with lofty projections of $5 per share in 2014 from essentially break even now (it actually lost $69 million for the year 2012).

Let’s look at a different measure: cash growth. Apple Inc. (NASDAQ:AAPL) grew cash from $120 Billion to $137 Billion from one quarter to another, a growth of about 14%. Amazon on the other hand increased its cash position from $5.25 Billion to $8.08 Billion in the quarter by borrowing $3.3 Billion. Essentially, after subtracting debt, Amazon’s cash position worsened. The optimist will say that Amazon is using its free cash flow to invest in its future, and that it took advantage of borrowing at very low rates. I say, show me the money!

Apple Inc. (NASDAQ:AAPL) continues to grow its cash pile, and despite returning money to its shareholders with a dividend of $2.65 per share, the growth in cash has been impressive. Apple has no debt.

Revenue growth projections for Apple remain healthy in the 10-20% range for the next year or two, but margins are projected to continue to decrease and that may lead to negative growth in EPS. Apple Inc. (NASDAQ:AAPL) could fix this by aggressively buying back shares. Revenue growth at Amazon should remain in the 20-25% level, and, this is key, its margins are expected to continue to increase from its current paltry levels. Even small increases in the case of Amazon should provide healthy profits in the future, but that is assuming that those margins can continue to increase. Many of Amazon’s businesses represent high-growth and high-margin affairs such as its relationship with third party vendors and cloud services, but the bulk of its business will remain a low-margin affair. Retailing remains a razor-margin business no matter how you slice it.