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Why Wall Street Loves Amazon, Not Apple

BEGIN TRANSCRIPT

RUSH: This is fascinating.  I have always been fascinated by this. Let me put it this way: Apple's stock price high occurred last fall.  After the iPhone 5 hit and a number of revisions with the iPad and the iPad Mini came out, Apple's stock price hit $705 a share.

All of the experts predicted that it was heading to a thousand, and then something happened, and the bottom fell out, and it wasn't long before Apple was at $425 a share. For a couple of days it was under $400 a share.  Now, all this time, Apple was showing massive profits.  They were reporting profits that were leading the industry.  But they were not the profits that the experts expected. 

Their profit was smaller than what was forecast by Wall Street analysts, and then the long knives came out in the tech media, and it became every day, "Let's kill Apple!"  While Apple was reporting massive profits, 73% of all profits in the domestic smart-phone sector are Apple's, their market share is small because they only make one phone. Well, they make three phones, but they make one phone at one price... Well, that's not true. 

They do sell the previous two models out there, and they do sell well, but they don't have a new phone every five weeks. They don't have 16 different models and variations of colors.  They've got one phone.  Their market share is tiny, but they own all the profit, and yet Wall Street abandoned them.  There were people trying to figure out why, but at the same time Jeff Bezos' Amazon was showing loss after loss after loss. 

When Bezos and the company would do the quarterly conference calls to report earnings to Wall Street, another loss or just a smidgen of profit would be reported, and Wall Street would go nuts with excitement! The stock price for Amazon launched ever higher!  As an average, ordinary... See, ever since the Federal Reserve began propping it up, Wall Street to me is a rigged game I'm not part of.  That's been my attitude. 

Because I know that whatever money Bernanke's pumping in there, I'm not seeing any of it.  But somebody is, and they're getting incredibly rich and Wall Street's being really propped up. There's been $800 billion of stimulus pumped from the Federal Reserve into Wall Street that's ended up buying securities, essentially.  QE3 is the most recent, and whenever Bernanke makes a public statement about maybe this is it, there is no more?

You watch what happens. 

There is a massive sell-off, and the Dow Jones Industrial Average plunges. 

There's abject fear.  So Wall Street's not being propped up by mom-and-pop investors.  It's being propped up right now by the Fed.  That's a little bit of another story.  In the midst of all this, a company that was showing no profit and no growth was loved and adored, respected and eagerly sought. And a company that owned 73% of every dollar of profit in the sector -- had never shown a loss, had always grown, the profits were growing every quarter -- was on the outs.

I said, "How can this be?" 

So I got in touch with some people that I thought might be able to explain it to me.  And here's what I was told.  Wall Street analysts, the people that work at these brokerage houses and issue notes to investors, giving their forecasts -- what they think company X or company Y is gonna do in the next quarter, in the next two quarters, the next year -- essentially these investor notes are investment advice.

I was told that these people always look at the growth potential, not what's happening now.  So the story on Apple was that they can't get any bigger than they are.  Not with what they're doing.  The phone is since 2007. It's six years old. The iPad's three years old. There's nothing new that anybody knows about. There's nothing that people see as out there that's gonna grow it.  Maybe they can't even sustain it. They were at $705.  Now on their recent run lately, they're at $460. 

This is what I'm told.  This is the way the, quote/unquote "experts" look at it.  On the other hand, Amazon is nothing but growth potential, precisely because it hasn't shown a profit.  The profit's gonna come. It just hasn't yet, because Bezos is busy investing in infrastructure. He's building new data centers. He's acquiring property and building new warehouses and things.  He's acquiring more data to sell and distribute, and so the profits are gonna be there.

Occasionally, I was told, Bezos will even report a small quarterly profit just to show that he can do it.  But Amazon is viewed as a company that's gonna break out big sometime.  "Nobody knows when, but it's gonna happen sometime and you better get in on it."  This is how it's being touted.  But it isn't now.  Intellectually I had the toughest time understanding, why invest in something that's not showing a profit, while it's growing. 

Even the profits that it does report now and then are just infinitesimally small, minutely small.  Next, the guy said there's a phrase that you need to associate with Bezos, if you want to learn how he operates and the things he does. It's called "free cash flow," and here's what free cash flow is.  Bezos sells books and whatever it is on the Internet, and you buy with your credit card and he gets the money that day. 

Now, in terms of books, he doesn't have to actually pay for the books that he's selling.  He doesn't have to pay the publishes for sometimes 60 days. So he's got free cash flow for two, sometimes three months that he can invest however he wishes, but it's his money. He's using it. He doesn't have to pay what he owns for a couple of months on money he gets that day. He gets it at the point-of-sale. 

Apple is this way in a way.  Apple has one of the largest database of credit card customers on file.  I mean, it's huge.  Amazon, too.  But Bezos, free cash flow is what these analysts say, "Look at this! He's just taking in all this money but he doesn't have to pay it back or pay it out for 60 or 90 days. He's got this money to invest grow or what have you."

It's more complicated than that.  I'm just trying to give you the basic shell of it as it was explained to me. But essentially the reason Amazon is so highly valued right now is because it's thought of as uncontainable. "At some point, Bezos is gonna be unable to not report profit.  That's how good it is."  I don't know if any of this is true.  This is just what these experts tell me in comparing Apple, for example, with Amazon. 

But the point is that Amazon's here to grow.  Amazon, however, didn't buy the Washington Post; Bezos did. It's a personal buy.  So we don't know if the same operating philosophy is going to be applied to the Washington Post.  We won't know for a while.  And as I say, our first indication will be how many journalists begin to have conniption fits after the first few staff meetings when Bezos takes over.

BREAK TRANSCRIPT

RUSH: John in Westfield, New Jersey. It's great to have you on the program, sir. Hi.

CALLER:  Yes, hello, Rush.  How are you?

RUSH:  Very well.  Thank you.  Yeah, you're up.

CALLER:  Okay, good.  I was calling to talk about why Apple is gonna go down.  I am short Apple stock right now, and I think you're missing one key point about Apple versus Amazon.  The key point is that Apple is a closed system so it's not gonna be creative in terms of project expansions and new product introductions, and their margins are decreasing now, and it's not gonna go the way it did in the past.

RUSH:  Well, now, wait. That comparison ought to be made to Android, not Amazon.

CALLER:  No.

RUSH:  The fact that Amazon... Well, Amazon's not open or closed.  I mean, Amazon's not the same business as Apple is.  I was simply discussing the way Wall Street people looked at the two businesses.  But Apple being a closed business model as opposed to open like Android, is that what you mean. Android's open. You customize it.

CALLER:  Well, Android is an open system, but so is Amazon.  Amazon is selling stuff; it also sells other people's stuff.  It's a fairly open system.  But the key isn't that Amazon is an open system; the key is that Apple is a closed system.  So it's competing with the Androids, the Samsungs, the HTCs, and all the other products.

RUSH:  Well, who's Amazon competing with?

CALLER:  Well, they're competing with all the other sellers.

RUSH:  Walmart, which is open.

CALLER:  Right.  But they're getting --

RUSH:  Target, which is open.  I know what you mean by closed system, and I can understand why you going short Apple, but I think if you're gonna talk closed versus open, that's a comparison of the Apple operating system for its computers and smart-phones and iPads versus Android's operating system, which is open. Users can customize it all they want -- and Apple, you can't.  You've gotta do what they give you, use what they give you, and that's it.  And there are arguments for both.  But I don't see Amazon in that... Now, I know what you mean about why Amazon's looked at profitably when it isn't and so forth. It's open for growth, but Apple...

I'm out of time, darn it. I wish I could finish my point.

BREAK TRANSCRIPT

RUSH:  The precise reason why I am a devout Apple, Mac, iPhone user is because it's closed, and not wide open and can't be screwed up by a bunch of doofus hackers.  

BREAK TRANSCRIPT

RUSH:  That last caller, I really do believe was confused, and I want to try to explain this to him. He may have meant what he said about why he was choosing Amazon for growth over Apple, but I think he's confused in comparing Apple as a closed system to Amazon as an open system.  What he meant... Well, maybe he meant what he said and he just meant to say that.

But the open-versus-closed argument, that's not an argument about stock price or position on Wall Street.  That is an argument over operating system preference.  In this country, the two competing mobile operating systems are Apple's iOS and Android.  Those are the two, and that's basically it.  Apple is the only one that uses theirs, but all the others use Android.  Samsung uses Android. Sony uses Android. (interruption)

originalWho?  Well, Windows, yeah. They've got their own, the Windows phone. But you have to use a magnifying glass to find 'em.  BlackBerry had their own operating system, too, and they're barely visible.  Samsung is trying to come out with their own so that they're not a prisoner to Android.  Theirs is called Tizen or something. They're not ready for it yet.  Anyway, again, this is really esoteric.  Some of you are gonna already know this. 

I mentioned that the reason I like the Apple/Mac is 'cause it is closed.  Here's why.  I had a BlackBerry.  When I had my Macs and all, I had a BlackBerry, and it was the most difficult thing in the world to sync up the address book and the calendar on my computer with the BlackBerry.  There was a program that did it, but it never worked.  It was a pain in the rear.  When the iPhone came along, the beauty for me was productivity and work flow.

Every iPhone I've got, every iPad, every computer, has the same stuff is on it, and it syncs automatically. It doesn't matter what it is. E-mails, address book, calendar, even the instant message program syncs up exactly, no matter what device I'm using. Websites on my browser, they're all there. If they're different from one place to another, I can go get the website.  Using my iPhone, I can easily get the websites that are on my home computer if I want to. 

I don't have to wait 'til I get home to get a website.  It's just, for me, it is nirvana.  Now, the Android people are different.  Android is open, meaning that anybody can customize it however they want, which means that hackers can get in and make messes and all kinds of things.  But the way it manifests itself... This gets really esoteric.  I'll speak to those of you who have iPhones.  The Android people are basically Google acolytes. 

They prefer Google Chrome to the Apple Safari web browser.  They prefer Google Maps to Apple Maps.  But if you're, for example, reading an e-mail on your iPhone and the e-mail contains a web link, and you click on it, it will open Apple's browser by default.  Apple will not allow you to have it automatically open the Google browser.  The Google people, the Android aficionados, don't like that. 

They wish Apple would open it up and let them select the browser they want to use so that if there is a link in an e-mail to a website, when you click on it, it would go to the Google browser.  Apple doesn't permit that.  That's what's closed.  It's the same with maps.  If there is an address in an e-mail on your iPhone and you click on it, it's gonna open Apple Maps. 

Google people think that Google Maps is better, and they don't want to go to the trouble of copying and cutting and pasting that address and then opening the Google Maps and pasting it in.  They wish clicking on the link would open the Google Maps app but Apple doesn't permit that because Apple, I think, wants to maintain the integrity of their operating system, and whatever that operating system promises to users, it will deliver. 

They just don't want any monkeying around with it.  Apple, I think, understands that most people don't even really care about this.  Apple's shotgun approach to the audience is, "Most people don't care about this. When they click on a link, they want the website to open, and that's it."  They just try to make it as easy as they can for people for people, as easy and intuitive as they can.

The people who like open systems are people that like to play around with it and customize it and so forth, and the argument is that Apple is killing itself by keeping its system closed whereas they would attract many more customers if they'd open it up and let their users customize things and so forth. Apple simply won't bend on this so the anti-Apple crowd is out essentially saying they're a closed system. 

That's what this guy is talking about.

He's shorting Apple 'cause they're closed, meaning restricted.  If you're using Apple, that's what you're gonna use.  Now, you can get the Google apps, and you can open Google Maps on your iPhone, and you can open the Google browser on your iPhone, but it won't automatically do it.  You have to actively choose it.  So it's not all that closed, when you get right down to it.  There's a lot of Google stuff that's now available on the iPhone. 

So I think, in some ways, it's a really esoteric nerd argument, open versus closed, and there's no answer to who's right and wrong on it 'cause it's all personal preference.  It's what you like.  In my case, I like the closed system 'cause I know what I'm gonna get.  I just do.  But I have all that Google stuff, and if I feel like using it, I do.  But, anyway, I want to get back to this Millennials story. This open-closed thing doesn't apply to Amazon.  There is no Amazon competitor that's closed. 

Walmart's open to everything. 

Target's open to everything. 

What would be closed about Amazon in the sense that Apple's closed versus Android? Well, the caller was saying that he's shorting Apple 'cause in my comparison, Apple is a closed system, and Amazon's a website selling stuff to you.  Apple is, too, but Amazon, aside from Kindle, you don't use anything of theirs. They're a third-party seller. 

END TRANSCRIPT

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