A week ago, Apple announced the most profitable quarter in the history of the company and the stock plunged 12 percent. A few days later, Amazon announced a 45 percent annual fall in profits, and its stock went up. What the what?
It's not just the past week. It's the past decade. Why is Wall Street so punishing toward Apple, the most profitable tech company in the world, and so forgiving of Amazon, which can barely turn a profit? This remarkably clear-eyed post by Eugene Wei, "Amazon, Apple, and the beauty of low margins," is the most elegant answer to the question I've read yet. Here is the money paragraph on competitive risk:
An incumbent with high margins, especially in technology, is like a deer that wears a bullseye on its flank. Assuming a company doesn't have a monopoly, its high margin structure screams for a competitor to come in and compete on price, if nothing else, and it also hints at potential complacency. If the company is public, how willing will they be to lower their own margins and take a beating on their public valuation?
Apple's core business is something that practically everybody wants to do (and can do): making phones and tablets. Amazon's core business is something that practically nobody wants to do (or can do): build a massive online database and offline infrastructure to transport boxes from warehouses to hundreds of millions of doorsteps. Seen in that light, Amazon's low-margin game isn't a weakness. It's arguably a strength, like a treacherous castle moat discouraging even the most swashbuckling entrepreneurs from daring to encroach on their turf.
For a deeper dive into how Bezos has house-broken investors to buy into his long game, read Justin Fox.
Update: Seconds after this post went up, Peter Misek, managing director at Jefferies & Company, calls and assents: "There is a view that in e-commerce, Amazon is, if not a true a monopoly, at least has a cushion, and a secure position that is unassailable whereas Apple's revenue is far more cyclical, based on products and innovation. I agree with some of the market [conventional wisdom] but not all of it. Apple is an ecosystem. I'm an iPhone user. The chances I leave are minimal because I have all my music and photos and such on the phone. The inertia or friction of moving is fairly high. But that might not hold for everyone."