Discussion Board 1 Apple and Amazon

DISCUSSION BOARD 1

Discussion Board 1

There are a number of reasons that could be floated in an attempt to explain why Apple’s stock happens to be priced only slightly higher than Amazon’s stock – despite the former’s market capitalization being twice as large as that of the latter. Ordinarily, one would expect Apple’s stock to trade at a significantly higher price than that of Amazon as a consequence of the big difference in the market capitalizations of the two companies. To begin with, the price could be impacted by the fact that Apple has more shares outstanding than Amazon. Secondly, the differences in the price of the two company’s shares could also be as a consequence of demand and supply factors. The demand for Amazon’s stock could be high as a consequence of a wide range of factors shaping or influencing investor expectations.

In my opinion, and based on my reading of the relevant materials, investors are willing to pay buy Amazon stock despite Amazon’s capitalization being significantly lower than that of Apple due to their expectations about the future performance of the two companies. For instance, with regard to expected growth in earnings base, it is likely that investors expect the earnings base of Amazon - despite its significantly lower market capitalization in comparison to Apple – to experience enhanced growth going into the future. Key considerations on the part of investors, i.e. in relation to earnings base expected growth, could be inclusive of, but they are not limited to, dividends per share, earnings per share, etc. (Brigham and Houston, 2015).

The relevance of financial statement analysis cannot be overstated when it comes to making based or rational investing decisions. Thus, in seeking to establish whether to invest in Apple or Amazon, I would first seek to comb through each company’s financial statements – specifically the balance sheet and the income statement. This, according to Berk, DeMarzo and Harford (2021), happens to be one of the most reliable ways of knowing more about a company. Some of the key financial ratios that I would rely upon on this front are inclusive of return on equity and the debt ratio. These have been highlighted in the tabular representations below.

a) Amazon

Ratio

Formula

Computation

Results

Return on Equity

Net income/shareholder equity

*in millions

Debt ratio

total debt/total equity

*in millions

NB: Data sourced from the most recent annual report.

b) Apple

Ratio

Formula

Computation

Results

Return on Equity

Net income/shareholder equity

*in millions

total debt/total equity

*in millions

NB: Data sourced from the most recent annual report.

Return on equity would enable me to compare Apple’s and Amazon’s success in as far as profit generation is concerned. It is computed by dividing the company’s net income with shareholder’s equity (Berk, DeMarzo and Harford, 2021). As per the tables above, Apple’s ROI happens to be significantly higher than that of Amazon. This means that Apple would rake in a significantly higher profit for each dollar invested. My conclusion is that Apple in this case happens to be more efficient in profit generation than Amazon. I would also be interested in determining which of the two companies could be deemed more solvent (in the long-term) than the other. In so doing, I would deploy the debt ratio which, according to Berk, DeMarzo and Harford (2021) is computed by dividing total debt with total equity. The lower debt ratio in the case of Apple is an indication that the company is less leveraged than Amazon – and hence less risky in as far as overall debt burden is concerned. This is an important consideration in my case owing to the fact that we face uncertain economic times as a consequence of the COVID-19 pandemic and the ongoing war between Russia and Ukraine. Thus, in the final analysis, on the strength of my analysis of both companies’ profit generating capabilities and financial leverage, I would rather invest in Apple.