Amazon.com, Inc. (NASDAQ: AMZN) has lost its focus.
The pioneer of clicks for sales has decided it wants to be the next Apple Inc. (NASDAQ: AAPL).
But there's a big difference between selling other people's products for a profit on a Website and becoming the provider of custom hardware solutions for retail buyers.
This transition isn't going to end well.
The Amazon Fire is a chopped-down tablet designed to compete with the iPad. There is a world of difference between the two products and where they are in their lifecycles.
Amazon is selling its Fire tablet for half the price of the iPad, which looks great on the surface. When you compare exactly what each product brings to the table, though, it's obvious the iPad 3 (due in mid-March) will douse the Fire.
The iPad 3 will have a slew of hardware enhancements over the last iPad, and while iPad 2 was a generational upgrade over the original, it still caught the world by surprise.
The tablet market has tried before to build a better-valued product to compete with the iPad, which is where the Amazon Fire comes into play.
The reality is that the Fire is a first-generation equivalent to the iPad but with smaller physical size and limited features.
The Fire is easily two years behind the curve in the Apple-equivalent build cycle of features for same purchase price. Two-year-old technology is an eternity when you're competing against the best product designers on the planet.
This is important because the bar continues to rise, and Apple can start to sell a similar product with a premium feature set at a slight markup, destroying Fire's niche.
This weakness is a terminal issue in my opinion.
When you think about it, Amazon is subsidizing the construction and sale of the Fire, with estimated losses on each unit, as it deploys them around the world to users.
This makes me wonder when the pain of the Fire will cause Amazon to adopt a less volatile business plan.
So it's time to sell Amazon.com Inc. (NASDAQ: AMZN) (**). The Fire will continue to burn investors in Amazon for quarters.
Up In Flames
A quick look at Amazon shows the company has low profit margins, pays no dividend, and has a high price/earnings (P/E) ratio.
Years ago, when Amazon was a growth stock, people understood why they retained their earnings — so they could use that cash to fund future growth. That doesn't make as much sense today, as the growth profile isn't there anymore.
Yet, long-suffering investors are stuck holding a stock that doesn't pay a dividend.
Amazon also has paper-thin margins. It's the nature of selling volume instead of high-margin products. Those margins are being compressed by a slowing global economy.
Finally, even after the drop in stock price over the last months, Amazon is still priced extremely rich. The current P/E ratio is 125-to-1, meaning it will take 125 years at current prices and earnings, for the company to earn back the price you're paying for a share today.
The teardown cost of the Kindle Fire was reported to be $201.70 each, with a retail price of $199. However, that price doesn't take into consideration the original or ongoing product development costs.
In a nutshell, the Fire costs Amazon to sell while providing fewer features than the baseline iPad.
Amazon is in a heavy product-development phase, and that cost is going to hit the bottom line for at least a year.
Action to Take: Sell Amazon.com Inc. (NASDAQ: AMZN) (**) before the flames of the Fire tablet destroy the underlying business model of selling products online for less than bricks and sticks can.
Amazon is attempting to take on the market leader with an inferior product that has an older-generation feature set and negative cost structure built into it.
I don't know when Amazon decided it was in the market to beat Apple at Apple's game, but they haven't brought a product to market to compete. There is more to a killer product than its cost.
If you have exposure to Amazon, let's look to sell using limit orders to ease the shares into the market. The market is due to price-in a better opportunity to buy equity than it currently is.
(**) Special Note of Disclosure: Jack Barnes has no interest in Amazon.com Inc. (NASDAQ:AMZN)
About the Writer: Columnist Jack Barnes started his career at Franklin Templeton in 1997. He started out in the company's fund-information department – just as the Asian contagion infected the Asian tiger countries.
Barnes launched his own shop, RIA, in 2003, just as the second Gulf War was breaking out. In early 2006, after logging a one-year return of nearly 83%, Forbes named Barnes the top stock picker in its "Armchair Investors Who Beat the Pros" competition. His two audited hedge funds generated double-digit returns in 2008.
Barnes retired to the beach in the summer of 2009, and continues to write from there. He's now the author of the popular blog, "Confessions of a Macro Contrarian," and his "Buy, Sell or Hold" column appears in Money Morning on Mondays. In his BSH column last week, Barnes analyzed BOK Financial Corp. (Nasdaq: BOKF).
News and Related Story Links:
- Money Morning:
How iTV and iPad 3 Will Push Apple Inc. (Nasdaq: AAPL) Over $600
- Money Morning:
Buy, Sell or Hold: 100 Billion Reasons To Buy Apple Stock
- Money Morning News Archive:
Previous "Buy, Sell or Hold" Features.
Confessions of a Macro Contrarian.