Apple Inc. (AAPL) & Amazon.com, Inc. (AMZN)’s Contrast

Apple’s R&D expense as a percentage of total revenue is even less than that of Hewlett-Packard Company (NYSE:HPQ). In 2012, Hewlett-Packard generated more than $120.3 billion in revenue. However, it only spent around $3.4 billion in R&D, accounting for 2.8% of total revenue. In the past five years, R&D expenses have represented only 2.35% to 2.99% of total revenue.

Jim Chanos, the most successful short seller, has commented that Hewlett-Packard Company (NYSE:HPQ) has been “purchasing” R&D. Consequently, Hewlett-Packard Company (NYSE:HPQ) could report higher net income and higher free cash flow (Free cash flow is calculated by subtracting capital expenditure from the operating cash flow). The five year average free cash flow was $8.8 billion. However, if the acquisition amount was included in the calculation of free cash flow, the five year adjusted free cash flow would be only $2.8 billion.

Normally, what doesn’t grow organically would have problems sooner or later. Indeed, in the fourth quarter, Hewlett-Packard had to record $8.8 billion impairment charges on its $10.3 billion acquisition of Autonomy. At the beginning of April, Hewlett-Packard announced that its chairman Ray Lane would step down. It was said that the chairman’s resignation was due to shareholders’ dissatisfaction over Autonomy’s acquisition. At $20 per share, Hewlett-Packard is worth around $38.8 billion on the market. The market values the company at 5.6 its forward earnings and only 3.8 times EV/EBITDA.

My Foolish take

Quantitatively, Apple Inc. (NASDAQ:AAPL) attracts me the most as an investment due to its decent dividend yield, potential buybacks, and cheap valuation. Amazon.com, Inc. (NASDAQ:AMZN), under the efficient leadership of CEO Jeff Bezos, would continue to grow in the future. However, with an extremely high earnings multiple and a high PEG ratio of 5, I would not want to touch Amazon at its current trading price.

The article Tremendous Growth or Great Returns? originally appeared on Fool.com and is written by Anh Hoang.

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