How does Amazon fit in this, really?
What may likely come out at least during cross-examination, could be that this entire case stemmed from an Amazon.com, Inc. (NASDAQ:AMZN) attorney getting in the ear of the DOJ about e-book publishers changing their pricing models, and the DOJ then asked for thousands of pages of information from Apple compared to very few pages of information from Amazon.com, Inc. (NASDAQ:AMZN).
What to watch for should be the highlight of the entire trial, when Apple lawyers cross-examine Amazon to get to the bottom of this entire case as Apple tries to establish the lack of merit in the case in the first place. Put simply, this discrepancy in evidence collection may be a big sticking point that could aid Apple’s outlook, as will shoddy testimonies like this.
Jeff Bezos of Amazon might have been pretty clever in having a hand in this in the first place, but Tim Cook is showing himself to be just as capable as a leader by not taking a settlement and exposing this entire case at trial.
Will Apple ultimately succeed? It is more likely now than it looked a few days ago, but Tim Cook at least knew that the strong move was to fight the case because of how it was established. Will this make the publishing houses look the fool for settling out of court? Possible. But then what?
How should investors play it?
From an investment standpoint, we wouldn’t recommend playing this situation on one side or the other, either via Apple stock, or in Amazon or News Corp (NASDAQ:NWSA). From a valuation standpoint, Apple’s clearly the most attractive—but what’s new—at 10 times forward earnings and a PEG of 0.50.
With more than $100 billion in cash, any outcome in this case won’t dent Apple’s cash hoard significantly, and a loss doesn’t seem set to change how investors are trading Amazon or News Corp either.
Regarding the latter, we’d consider the media giant for its upcoming spinoff of its newspaper and publishing business, particularly for shares of the re-named 21st Century Fox, the higher growth entertainment business that will remain post-split. The publishing division meanwhile will be a cash king, loaded with an estimated $2.6 billion in cash and zilch in debt.
Amazon, on the other hand, is incessantly called “overvalued” in the financial media, but shallow P/E ratios and growth estimates aside, it appears that the markets are valuing the behemoth for its booming online traffic, which has increased by 55% in two years. If Amazon can increase its conversion rate, which rests near 9-10%, to levels of eBay Inc (NASDAQ:EBAY), which converts 11-12% of its customers to sales, continued revenue gains could drive even more appreciation.
On the whole, we’ll continue to watch this situation closely, but just like with many things in the investing world, the eBook drama of Apple, Amazon and News Corp is worth watching. There’s a lot more than meets the eye; continue reading about other market strategies at Insider Monkey.