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Why You Should Buy Amazon And Sell Apple

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Amazon just surpassed Microsoft and Apple to take the top spot as the most highly-valued company.

Yet Amazon trades 20% below its all-time high while Apple shares sit 36% below theirs. Does that make Apple a screaming bargain and Amazon too dear?

The answer depends on how their stock prices compare to their growth potential. And by that measure, Apple has further to fall while Amazon is the bargain.

And the reason for the difference can be found by examining the difference in how Apple and Amazon are doing in India.

Unlike Apple, Amazon has done a better job of understanding what is different about competing in rural India than in other places and has adapted its strategy to deliver more value to customers there.

(I have no financial interest in the securities mentioned in this post).

Amazon leads the world in market capitalization as of January 8. According to the Wall Street Journal, Amazon's $797 billion market cap exceeded Microsoft's by $13 billion and Apple's by $85 billion.

This does not make Apple stock a bargain. Apple is shrinking while Amazon is still growing fast.

After all, on January 2 Tim Cook wrote shareholders to  let them know that Apple would report 5% lower revenue for the December-ending quarter compared to last year, Meanwhile, Amazon is expected to post 20% revenue growth in that quarter, according to FactSet.

Why is Apple shrinking and Amazon growing? Amazon is doing a better job of delivering a product that customers want to buy.

More specifically, as I wrote in Disciplined Growth Strategies, customers compare products based on a specific set of ranked customer purchase criteria (CPC) -- such as quality, price, and service.

While Amazon takes the trouble to understand those CPC and offer customers a product that wins in the eyes of customers, Apple can't be bothered. Therefore, Amazon customers get a better value than Apple's do; Amazon grows and Apple loses market share to rivals who offer customers the best value.

This difference is evident when comparing how the two compete in India.

Apple falls short in India

In 2016, Apple set its sights on expanding its presence in India but it failed to do as good a job as rivals at offering consumers there what they wanted.

Apple  started selling the iPhone in India in 2008 -- by 2011, Apple's India sales hit $100 million -- rising to $1 billion by 2015, according to the Wall Street Journal.

CEO Tim Cook visited in 2016 with hopes of increasing that number to $5 billion by 2020. That goal remains elusive. Apple achieved only $1.8 billion in India revenues this fiscal year -- less than half Apple's goal for the year, according to the Journal.

Apple's iPhone market share in India fell in 2018. iPhones shipped in India were down 40% and Apple’s market share there dropped to about 1% from about 2% in 2017, Canalys estimated.

Why? Apple's iPhone price is too high and its battery life is too short. For example, Chinese rivals -- including OnePlus, Xiaomi, Oppo and Vivo - are gaining market share by selling smartphones for less than $200. Apple's cheapest version went for $550, according to the Journal.

What's more, Indian consumers want a long battery life. Unlike Apple which shuns market research, rival OnePlus has conducted extensive market research in India.

OnePlus -- which leads Apple in the premium segment with a 30% share to Apple's 25% -- learned that improving battery performance is a crucial product feature there "because customers often work long days away from electrical outlets and spend hours commuting through Indian cities’ thick traffic," according to the Journal.

Amazon prevails in rural India

Amazon reinvented itself to gain market share in India.

The result is that it generated $7 billion in merchandise sales in the year ending March 2018 in India targeting the 800 million people who live in rural parts of India, according to the Wall Street Journal.

Thanks to a newly upgraded wireless network -- an upgraded 4G mobile internet has been introduced across India --  those rural Indian consumers represent a huge growth opportunity.

Amazon expects Indian online shoppers to triple in the next few years and most of them will be in rural areas. "More than 80% of its new customers this year are from outside India’s biggest cities," according to the Journal.

Unlike Apple, Amazon has changed how it competes based on a detailed understanding of rural Indian consumers and logistical challenges there. To that end, Amazon adapted its e-commerce value chain to work there.

Its app is designed to work on cheap smartphones for people who can't read. As the Journal noted, Amazon "modified its app to work with inexpensive smartphones and patchy cellular networks. It has added hundreds of thousands of Indian language descriptions of products and videos for those who can’t read."

Moreover, Amazon built a network of stores staffed with people who help consumers buy and pay for items Amazon sells. Specifically, Amazon opened physical stores where staff help consumers order online.

And it partnered with "tens of thousands of local distributors to deliver packages, often by bicycle down dirt roads, where it will accept cash or digital payment on delivery," noted the Journal.

What's more, Amazon appealed to Indian politicians by investing in India. Since Amazon opened operations there in 2013, it promised to invest at least $5 billion there in its "warehouses and logistics network, technology, customer and seller recruitment as well as staff and content development for Amazon Prime," the Journal wrote.

Simply put, in the markets where it seeks growth Amazon adapts its strategy to offer potential consumers a better deal than rivals. Apple doesn't.

That's why Amazon stock is a bargain and Apple's is over-valued.

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