FAANG is an acronym used to describe five popular US companies in the tech sector - Meta Platforms (formerly known as Facebook (FB), Amazon.com (AMZN), Apple (AAPL), Netflix (NFLX), and Alphabet (Google’s parent company) (GOOGL). These companies are very popular with investors and have seen impressive returns in recent years.
However, the current market correction, coupled with Fed policy tightening, has hit tech stocks hard, as is evidenced by the Technology Select Sector SPDR ETF’s (XLK) 19.46% loss since the beginning of 2022 versus the SPDR S&P 500 ETF’s (SPY) 13.76% loss over the same period. However, challenging times like these allows investors to scoop up shares of prominent companies at a considerable discount.
With this in mind, today, I’ll analyze and compare two FAANG members, Apple (AAPL) and Amazon.com (AMZN), to determine which stock presents a better buying opportunity.
Apple Inc. is an American technology company that engages in the design, production, and sale of various high-tech electronic products such as smartphones, tablets, laptops, wearables, and other variety of related accessories and services. Founded in 1994, Amazon.com is the largest e-commerce company in the world, as well as being a leader in cloud computing, digital streaming, and artificial intelligence.
Year-to-Date (YTD), AAPL has dropped 16.25%, while shares of AMZN have lost 27% over the same period.
Recent Developments
On June 1st, Nikkei Asia reported that Apple is shifting some portion of iPad production away from China to Vietnam after severe COVID-19 lockdowns in China affected the company’s supply chain. This move aims to diversify Apple’s supply network, considering that the company shipped around 58 million iPads worldwide last year. Also, April smartphone data in China revealed that Apple shipments stood at 1.7 million units for the month, below the historical average of 3.1 million shipments. Most likely, this trend reflects the impact of consumer spending slowdown caused by shutdowns.
On June 1st, JPMorgan analyst Doug Anmuth called Amazon.com his best idea. The analyst noted that U.S. e-commerce sales advanced 6.7% year-over-year in Q1 to $231 billion. Although U.S. e-commerce penetration dropped year-over-year for a fourth consecutive quarter to 20.7% of adjusted retail sales, Anmuth expected this figure to rise to 40% in the foreseeable future. Finally, the analyst expects an acceleration in Amazon's revenue in the second half of 2022 due to the growth in its "key under-penetrated categories."
Financial Overview & Analysts' Estimates
On April 28th, Apple declared an earnings report for the second quarter of 2022. In Q2, the company's total revenue increased 8.6% year-over-year to $97.3 billion, primarily driven by a 5% YoY increase in iPhone sales to $50.57 billion. Also, AAPL's Services revenue stood 17% higher year-over-year at $19.82 billion, while the Mac segment advanced 15% year-over-year to $10.44 billion. Not surprisingly, Apple surpassed the Wall Street consensus revenue projections by $3.31 billion. The tech giant's second-quarter GAAP EPS has been reported at $1.52, beating Wall Street estimates by $0.09.
For the third quarter, analysts expect AAPL's EPS to be $1.15, down 11.36% year-over-year. Additionally, an $82.51 billion average revenue estimate for the third quarter of 2022 shows a moderate 1.32% year-over-year improvement.
On April 28th, Amazon announced earnings for the first quarter of 2022. In Q1, Amazon's net sales grew 7.3% year-over-year to $116.44 billion, standing in line with analysts' top-line estimates. However, excluding the $1.8 billion unfavorable impacts from year-over-year changes in foreign exchange rates during the quarter, the company's net sales grew 9% YoY. Besides, Amazon's first-quarter GAAP EPS was ($7.56), significantly missing the analysts’ estimates by $15.78. That's because the company reported a net loss of $3.8 billion in 1Q22 compared to a net income of $8.1 billion in 1Q21.
It is important to note that AMZN’s operating cash flow deteriorated 41% to $39.3 billion for the trailing twelve months, while free cash flow turned to an outflow of $18.6 billion over the same period.
The company’s EPS is expected to decrease 76.29% YoY to $3.58 in its second quarter of 2022. However, analysts expect AMZN's revenue to rise 6.10% year-over-year to $119.98 billion in the current quarter.
Comparative Valuation
In terms of Forward P/E, AMZN is currently trading at 129.17x, which is significantly higher than Apple, whose multiple presently comes in at 24.23x.
When it comes to the TTM EV/EBITDA multiple, AMZN's EV/EBITDA multiple of 22.49x is about 25% higher than AAPL's 17.98x.
Bullish Options Bets Placed On AAPL Stock
The open interest levels for July 15th, $145.00 call options, increased modestly on May 27th. According to data provided by barchart.com, the open interest rose by 5,717 contracts to about 26,329. A buyer of those calls would need AAPL stock to rise to $154.95 by the middle of July, which represents an upside opportunity of about 4% from current levels.
The Bottom Line
While both AAPL and AMZN are well-known blue-chip stocks, with excellent growth prospects, I believe that AAPL stock looks more attractive at current levels because of its better financials, relatively lower valuation, and positive options market sentiment.
AAPL shares were trading at $148.09 per share on Thursday morning, down $0.62 (-0.42%). Year-to-date, AAPL has declined -16.37%, versus a -13.59% rise in the benchmark S&P 500 index during the same period.
About the Author: Oleksandr Pylypenko
Oleksandr Pylypenko has more than 5 years of experience as an investment analyst and financial journalist. He has previously been a contributing writer for Seeking Alpha, Talks Market, and Market Realist.
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