I’ve long been an Apple (Nasdaq: AAPL) bear. But we’re all capable of change. 

#-ad_banner-#When AAPL fell more than 40% to just under $400, the forward price-to-earnings (P/E) ratio fell to barely 10 and the dividend grew to just over 3%. The stock suddenly made sense from an investment standpoint, and I began including it in client portfolios. 

Similarly, I was the lone Android user in a house full of iPhone users. But when my contract expired a few weeks ago and my carrier offered me a free iPhone 4S, I became an adopter (if not a fanboy). 

Having used an Android device for a few years, I used Amazon.com’s (Nasdaq: AMZN) cloud music player and built a decent cloud library. When I switched to the iPhone and downloaded the Amazon cloud app, I was immediately bombarded by offers from Amazon to buy MP3 albums from my favorite artists at $5 a pop. 

Amazon knew I had switched devices and wanted to keep me from straying to iTunes. So far, I’m still loyal. 

But as an investor, I would buy Apple’s stock before Amazon’s. A few numbers explain why.

For the life of me, I don’t understand why anyone would own Amazon shares. 

Granted, Amazon has changed the way people shop. Amazon has built a massive business, but the margins are razor-thin (even after the recent price hike to its popular Amazon Prime shipping service). The company is evolving from a content seller to a content generator and manager with its popular streaming services, successful cloud product, and its foray into original content production. 

But after 17 years, it’s time for Jeff Bezos and company to prove Amazon is a viable business.

All Grown Up
As I said, I’m a reformed Apple bear. But I’m also a value investor, and I recognize a good opportunity when I see one. AAPL is becoming one of those dependable “bondlike” stocks, with consistent net margins of 20%-plus over the past five years and 20% dividend growth. 

But is that growth sustainable? The iPhone has lost its market share crown to Android, so the hardware-driven annual growth of 40% in sales and net income is probably a thing of the past.

Mobile devices represented 76% of Apple’s $170 billion in revenue last year. The content business (defined as iTunes, software and services) represents just 8% of the sales mix. Furthermore, the content division’s margins are reported to be close to 90%, compared with 37% for the company as a whole. 

Content Is King
As I learned from changing from Android to iPhone, at the end of the day, it’s not the device itself that matters — it’s all about what’s on the device. That’s where the money is to be made.

Consider the example of RCA (now GE (NYSE: GE)), which created NBC in the roaring 1920s to broadcast programming over the millions of radio sets it was selling. NBC is still around as a content company.

Amazon began as a content company and has added hardware to the mix. Apple had long been a hardware company until the birth of the iPod and iTunes. That changed everything. Amazon realized it needed some form of hardware presence, thus the Kindle, Fire and recently announced Fire TV set-top box. 

Long known for its hardware, Apple realized that it couldn’t command premium prices forever, leading to the development of the iPad Mini and the iPhone 5C. Last year, Apple celebrated its 50 billionth download from its App Store, so the company knows the trend toward content is the natural evolution of things. 

I don’t think Apple will screw up in expanding a portion of the business that’s capable of keeping 90 cents of every dollar it earns. The company’s little gadgets should continue to surprise and delight — while the stuff consumers do on the gadgets should earn money for investors.

Risks to Consider: The biggest risk is Apple’s ability to execute. When three-quarters of your business comes from one segment, managers tend to become myopic. Another glaring risk is Apple’s eventual earnings deceleration. Any hint of this will punish the share price, which can appear expensive.

Action to Take –> From an investment standpoint, Amazon vs. Apple is classic growth versus value. However, in Amazon’s case, I don’t see either due to the erratic nature of its numbers. Apple represents true value. 

Shares currently trade near $540 a share with a forward P/E ratio of 12.6 and yield 2.3%. The stock has all of the characteristics of a classic large blue-chip company. Based on the huge opportunity the company has to grow its high-margin content business, the current valuation of the stock is a good entry point for long-term investors. I hesitate to put a near-term 12-month price target on the stock due to the possibility of near-term volatility. 

Apple shares should be purchased cautiously, and any pullback in price should be used as an opportunity to buy. Investors considering Amazon shares should not see a pullback as a buying opportunity, and those holding AMZN should seriously consider realizing gains or cutting losses.

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