Key Points
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Apple and Amazon both have relatively slow growth rates.
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Amazon’s high-growth segments are causing strong profit growth.
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Apple’s profit and revenue growth are closely linked.
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Apple and Amazon both have relatively slow growth rates.
Amazon’s high-growth segments are causing strong profit growth.
Apple’s profit and revenue growth are closely linked.
Apple (NASDAQ: AAPL) and Amazon (NASDAQ: AMZN) are two of the largest companies in the world and are both members of the “Magnificent Seven” group of stocks. Both companies have delivered excellent long-term returns for shareholders, but does either investment stand out as a better one to buy right now?
Let’s take a look at both companies and see which one is the best buy today.
Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. Continue »
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Both companies have relatively slow revenue growth
Amazon and Apple aren’t the pinnacle of growth for big tech. Each company has posted fairly mundane growth rates over the past few quarters, which might cause investors to wonder why they want to own either stock.
AMZN Operating Revenue (Quarterly YoY Growth) data by YCharts
With each stock growing less than 10% during its most recent quarter, I wouldn’t blame anyone for questioning whether these two could be named growth stocks. However, when you dig into each company, it’s clear one still deserves the growth stock adjective.
Apple’s lack of growth stems from a few issues. First, Apple hasn’t released any innovative products or features for multiple years. They are a clear example of a company riding on prior success and are still succeeding with that model. One area where this has become abundantly clear is AI, as Apple is behind nearly every smartphone company in terms of AI features.
Another area Apple has been harmed is the lengthening smartphone turnover cycle. A decade ago, each iteration of the iPhone brought massive innovations and must-have features. Now, the phone purchased today isn’t all that different from a two- or three-year-old phone. This innovation slowdown has caused consumers to upgrade phones less frequently, which has harmed Apple’s growth rate.
Amazon is a completely different story. Most people recognize Amazon for its e-commerce platform, which generates the lion’s share of revenue. In Q1, online stores and third-party seller services generated $94 billion in sales. Considering Amazon generated $143 billion in total revenue in Q1, that’s a significant portion of its total revenue. These two segments were also the slowest-growing of all of Amazon’s segments, which dragged down the overall growth rate.
However, Amazon still had some strong performers, with Amazon Web Services (AWS) and advertising services rising 17% and 18%, respectively, in Q1. The strong quarter for both of these segments is hidden within Amazon’s total revenue growth rate; however, the impact that these two have on Amazon’s profit margins is undeniable.
Amazon’s profit growth makes it a better buy than Apple
Despite AWS accounting for only 19% of total sales in Q1, it generated 63% of operating profits. While Amazon doesn’t break out advertising operating margins, it’s safe to assume they are incredibly high, especially when advertising-focused companies like Meta Platforms (NASDAQ: META) deliver operating margins of 40% or greater. It’s highly likely that a large chunk of Amazon’s profits from the commerce business come from this segment, although there’s no way to know for sure.
Still, because Amazon’s high-margin businesses are growing at a high-teens rate, that means its profits are also rapidly increasing. In Q1, Amazon’s operating profits increased 20% year over year, marking an excellent result. Compared to Apple, whose operating profits grew only 6%, this is a significantly better result.
Apple doesn’t have the same catalyst for expanding profit margins as Amazon does, so its margins are closely tied to its revenue growth rate. On the other hand, Amazon’s profits are growing substantially faster than Apple’s and are likely to continue doing so with its strong-performing advertising and AWS business segments. As a result, I think Amazon is a far better buy right now, as it has an earnings growth catalyst that Apple doesn’t have.
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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. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Keithen Drury has positions in Amazon and Meta Platforms. The Motley Fool has positions in and recommends Amazon, Apple, and Meta Platforms. The Motley Fool has a disclosure policy.