Why I Prefer Apple Over Amazon

Apple (APPL) shares got hammered Thursday, thanks to the lofty expectations for the tablet device. If it was being brandied as something that Moses himself brought down from the mountain then it's not a surprise that traders were disappointed to see a more earthly looking device.

But given the sell-off of today Apple shares are looking very attractive. Though in the meantime there might still be some pressure as day traders and people in search of quick profits wander away from the stock because it did not rise 10% right after the announcement. Also trade might have become more crowded given that everyone knew about a world-changing tablet just about to be launched. Apple's tablet, iPad, may not be world changing in the short term but like most other products from Apple, it will create its own base and create a new market which will be led by Apple.

In my opinion at 20x P/E, Apple shares are a steal given the enormous growth still to be tapped from iPhone, by far the most extraordinary phone that was launched in a very mature market. But iPhone allowed Apple to become an industry leader in just over 2 years leaving the likes of Motorola (MOT) and Samsung (SNSLF.PK) far behind in the smartphone market.

I prefer Apple shares over Amazon (AMZN) because I think compared to each other, Amazon is way overpriced relative to Apple. With 331 million floating shares of Amazon and the latest quarter earnings of $0.85 and 897 million floating shares of Apple and latest quarter earnings of $3.67, you can compare the huge EPS and ROE (Return on equity) advantage of Apple over Amazon. I am not saying that Amazon is a bad stock, I am talking about relative value here. Investors will be much better off owning Apple shares due to very high return on equity.

Also given that Apple is entering the e-reader/netbook/tablet/game console business through its one-in-many device iPad, I think the earnings growth potential is huge. This means much higher return for the shareholders. Apple can generate any earning it wants in the near future by offering iPhone in still many countries or opening it up for direct sale like Google's (GOOG) android phone. Now the accounting rule has been changed to recognize the revenue from iPhone at the time of sale as opposed to the incremental recognition through out the service contract duration. This means Apple can very easily start offering iPhone outside the service contracts. According to my cashflow analysis, Apple's share price target comes to around $270. This means a 35% upside from the price at Thursday's closing. I rate Apple shares as strong buy. This pullback creates a good entry point for apple shares.

Disclosure: No position at the time of writing in any stock mentioned in the article. I'll initiate new long position in Apple stock.