“Nothing exemplifies the pretzel logic of Wall Street better than the reaction this week to earnings reports from Amazon and Apple,” wrote Paul Vigna for the Wall Street Journal. “It was a true triumph of perception over reality.”
“This market is just nuts,” Sucharita Mulpuru, an analyst with Forrester Research, told the New York Times. “Amazon’s profit is effectively 0% of revenue and everyone cheers. Apple grows faster and has a profit that is 20% of revenue, and the stock tanks. Amazon’s stock price doesn’t seem to be correlated to its actual experience in any way.”
This may be news to the Journal and the Times, but long-time Apple investors have heard it all too often.
What’s going on? As I see it, two things.
First, when it comes to profits, Apple and Amazon have very different incentives. Amazon wants to capture the fast-growing e-commerce business by offering customers the best experience and the lowest prices. The company pours whatever profits it makes into expanding its retail footprint.
Apple is focused on capturing the most profitable segments of every market it enters by making a small number of high-quality products that change lives. It pours some of its profits into expanding its offerings, but it can’t spend the money it’s making fast enough.
Apple profits now, builds later. Amazon sells now, profits later.
Second, as the Journal‘s Vigna points out, the stock market is not your run-of-the-mill beauty contest.
In his “The General Theory of Employment Interest and Money” John Maynard Keynes compared the stock market to a guessing game that used to be popular in British tabloids. Readers were shown pictures of 100 hopefuls and asked to pick the six prettiest. The winners would be those whose lists came closest to the consensus.
What ends up happening in that kind of contest, Keynes explained, is that participants make guesses based not on their own judgement, but on what they think others are thinking. “In other words,” Vigna writes, “fundamental considerations become secondary to perceptions—your perceptions of other people’s perceptions.”
Amazon, which made a profit when Wall Street was prepared to see another loss, beat expectations. Apple turned a record profit but didn’t sell as many iPhones as expected. Its market cap racked up its fourth largest one-day drop.
After the market’s latest display of pretzel logic, Horace Dediu gave readers of his Asymco blog a rare stock tip:
Let’s say I offered you the option to invest in a monopoly or in a hit-driven company whose survival depends on always finding the next big thing Which would you invest in?”
“Historically,” he writes, “capital has always gone toward the stable and away from the unstable. Wealth has gone the other way.”