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AMZN, AAPL Hit $1 Trillion: Can They Sustain the Dream Run?

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On Sep 4, Amazon.com, Inc. (AMZN - Free Report) became the second publicly traded U.S. company to reach the $1 trillion market cap. Amazon’s entry into the $1 trillion club comes within five weeks of Apple, Inc (AAPL - Free Report) becoming the first U.S. company to hit the magic $1 trillion figure.

Apple and Amazon’s entry into the 13-digit territory once again proves that tech stocks have been one of the key drivers of the market. Investors will now keenly be watching which company becomes the next to reach this milestone, with both Microsoft Corporation (MSFT - Free Report) and Alphabet, Inc. (GOOGL - Free Report) around $150 billion away.

Amazon Helped by Diversified Business

It took Amazon 24 years to reach the $1 trillion milestone, quite less than Apple, which reached the magic figure in 38 years. Amazon’s strength lies in its Amazon Web Services (AWS) business, as well as advertising it sells across sites. These have helped the e-commerce giant to expand into other non-core areas. Last year, net sales in AWS grew 43% over the prior year, accounting for almost 10% of Amazon’s total revenues.

In fact, investors today are more interested in Amazon than the entire brick-and-mortar sector, where 90% of the retail spending still takes place. But that’s what makes Amazon more appealing to investors. Of the total retail spending, Amazon accounts for almost 50%. So much so, that it has made brick-and-mortar giants like Walmart, Inc. (WMT - Free Report) and Target Corporation (TGT - Free Report) shift their focus to online.

Interestingly, in the beginning of 2018, Amazon was worth around $580 billion. And in eight months, it has touched $1 trillion. In the last reported quarter, Amazon’s net sales jumped 39% year over year. Moreover, the company expects revenues in the range of $54.0-$57.5 billion in the third quarter of 2018, which would represent growth of 23% to 31%.

That said, competition and regulation pose big challenges for Amazon in the future. The company’s AWS business faces competitive risk from Microsoft and Google, the two key players in the cloud business. At the same time, Amazon faces regulatory threats. President Donald Trump has time and again attacked Amazon, tweeting that the company is “a no tax monopoly.”

Price Performance: Year to Date

Will Apple’s Growth Slow?

On Aug 2, Apple became the first U.S. company to have a $1-trillion feather in its cap. Apple’s shares have been rallying since it reported third-quarter fiscal 2018 earnings on Jul 31, wherein it posted robust iPhone and Services segment revenue growth.   

iPhone, particularly iPhone X, has been the key revenue generator for Apple, despite being priced at $999. However, it’s the Services segment that has over the last few years become Apple’s key revenue source. Services, including revenues from Internet Services, App Store, Apple Play, Apple Music and AppleCare, and licensing and other services jumped 31% year over year in the last reported quarter. Apple carries a Zacks Rank #2 (Buy), while Amazon sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

However, it needs to be mentioned that the growth in iPhone sales is slowing. Apple sold only 1% more iPhone units than a year ago in its last reported quarter. Moreover, it doesn’t have any new big product around the corner, particularly in artificial intelligence or augmented reality.

The good thing is that Apple too realizes this and has started focusing on other areas. The Services segment is a priority for Apple, and its saving grace too. Much like Amazon, even Apple’s survival depends on diversification. The company is also investing in original content and developing its own streaming service. Apple also plans to launch a cheaper as well as an expensive version of iPhone X in the near term to reach a broader customer base.

Apple and Amazon have proved their worth as tech giants but now need to retain their newly achieved laurel to stay ahead in the race.

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