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Going Long Apple and Short Amazon

3 October 2008 2 Comments

Tech stocks have taken a beating recently. As such, I have made a few moves in my stock portfolio. I have added to my Apple (AAPL) position buying shares under $110 a share. Furthermore, I recently took up a short position on Amazon (AMZN) at approximately $70 a share. Let me explain this position.

Hedging A Position

The short on Amazon will definitely serve as a hedge against my long Apple position which over the short term will be affected by overall movements in the tech sector. If the tech sector has continued weakness, my short position will help hedge against losses in my long position.

Price-To-Earnings Multiple Contraction

In a weak consumer environment, tech stocks with high multiples tend to get hit with some multiple contraction. The higher the multiple, the more severe the hit on the stock price typically. Apple, while it will be affected somewhat by a weak consumer, has a much lower multiple at current levels than Amazon. Apple’s forward P/E is approximately 17 which is the lowest it has been in some time; Apple’s trailing P/E is under 20. Amazon, however, still has a trailing P/E over 50 and a forward P/E over 30.

I am a stronger believer in Apple’s future vs. Amazon. I also believe Amazon has much more multiple contraction ahead at current levels when compared to Apple.

iPhone vs. Kindle

Forbes had a interesting article today comparing sales of the Kindle vs use on the iPhone for reading digital texts. This article details that more downloads of the digital text application have been downloaded since July for the iPhone than total estimated sales of Amazon’s Kindle device for the entire year of 2008. This is a pretty drastic difference in usage and when considering the multitude of other uses of the iPhone, it seems to think the Kindle won’t be around much longer.

While both of these devices represent small portions of these company’s overall revenues, the iPhone represents a serious growth story especially when you consider the entire international market. The iPhone has much more potential for many years vs the minimal temporary success of the Kindle.

Lastly, the retail situation is worth addressing. The weak consumer will drag down just about all retailers. Fortunately, retail is just one aspect of the entire Apple story (and a bright aspect considering the continuous crowds in their stores). Amazon is 100% retail, and they will be hit hard by the consumer.

Conclusion

While the economy is very weak and the consumer is likely to continue to deteriorate, I believe Apple’s shares have significantly more potential for upside than Amazon. If both get hit hard, my short position serves as a great hedge against my long position. If you are long on Apple, you may want to consider a short in Amazon or another high multiple tech stock or retailer.

Side Note

On a random side note, Apple’s new genius sidebar in the new version of iTunes is pretty cool and is definitely going to help increase sales of music.  Apple hardly makes much on the music it sells, but these new features will help solidify Apple as the #1 music retailer.

2 Comments »

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