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 $600 - Money Morning:
Buy, Sell or Hold: 100 Billion Reasons To Buy Apple Stock - Money Morning News Archive:
Previous "Buy, Sell or Hold" Features. - JackBarnes.com:
Confessions of a Macro Contrarian.
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When the iPad 3 is released,
the iPad 2 will drop to a price which will "douse the fire".
Then what will happen to AMZN's crazy P/E ratio?
wHY IN THE WORLD did you say to sell AMZN in MArch 2012 when it is up 50$ since then??
Well said. AMZN is a terrible Stock to own, and with darlings like Apple, who has a well performing Stock that still isn't even NEARLY close to fair valued, i.e they're EXTREMELY undervalued, while the company is growing practically 100% year over year, around, you'd think people have to be NUTS to invest in AMZN. Amazon is a good company, but INCREDIBLY overvalued Stock.
What amazon doing is, they are taking it from rich people and redistributing it to everyone, this type of business model is not sustainable, rich will remain rich until the money runs out, jeff benzos seems to believe he needs to help everyone within the cosmos, while is this is nice, what gives anyone the right to help the cosmos and be considered they are helping ? maybe the cosmos does not want to be helped, you see, cosmos looks for patterns to send it's waves into of, if patterns are artificial, they are not long term. Amazon is creating Artificial Patterns, perhaps this explains why i am poor and american musicians are not.
thank you so much, my web site void[dot]is will be published on palo alto daily news newspaper on january 2013 and i will move back to turkey as it seems evident since 2003 i have had some dicksuking amerikan authorities spying on me and ruining things for me.
fuk amerika incorporated.
– Sumer Kolcak
The analyst/writer didn't even understand the ecosystem behind Amazon Fire's business model – sounded like one eyed opinion.
I strongly agree with you , I too have the same opinion but I am not in a position to short AMZN at this situation, I bought at 246USD, now the value is 179. If I have to sell now I have to book huge losses. So I am in big confusion now. Thanks for useful info and I will make sure to sell these as soon as there is slight up in near future.
The author is totally forgetting the fact that Amazon is not just plain retailer on web. Amazon is the creator of hardware as a service (HAAS) model which is used by many big companies and many online e-commerce retailers. The problem is that many on wall street perhaps do not understand the technological strength of amazon and view amazon only as a retailer. Amazon is a SOLID software/technology company and that needs to be acknowledged. Only then one can understand or predict or be able to comment on anything that amazon does with its products/services offered to its customers. So please don't be ignorant about facts that matter and write articles just based on superficial information.
if the iPad3 is as revolutionary as the iPhone4s it might run into some headwinds. I am not saying it isnt going to sell well, just that it wont sell as well as this guy thinks. I think people will suffer weak upgrades to their phone, but not so much on a tablet. If the iPad3 is really an iPad2s there wont be supply issues. However I think Tim C wont make this mistake.
Its interesting that this author doesn't take into account Amazon's existing ereader business (the hardware side) its not like this is their first attempt at hardware. I think AMZN will do a phone before too long as well. Bigger KF will come first, but then a phone and if they are smart, a PMP as well.
Anything to hook them into the AMZN folds, just like AAPL does.
Very interesting. I know the definition of P/E but that doesn't mean the workins come easily. 125 years payback, so does that mean Apples 11/1 P/E will take 11 years?
Well, at least Amazon has the gumption to adventure something different. Now we need an analysis on Samsung.
Amazon is adopting the business strategy that cheap printer manufacturers have made money on: sell the hardware as a loss-leader and make the money on the consumables (e-books). The writer completely missed this very important point. I'd never buy one of those tablets anyway but I still can see that.
Apples fall and rot. The Amazon can be cut down, but it fights back and evolves. People are not going to pay $2000 for 4gigs of RAM forever just because it came in a white plastic box and was sold to them in a store with a 1:1 sales person to customer ratio. People are not going to want to be herded toward proprietary solutions for every problem.
I'm not saying their technology with respect to the iPod, etc. isn't (wasn't) novel, but Apple's business model, however trendy and marketable, is not sustainable for long term growth. Remember that the iMac which saved them initially (before the iPhone) was just an over-priced computer with a colorful plastic back paneling and dated, proprietary software. Apple is huge because of profit margins, yes, but those profit margins were initially built on aesthetics, not technology or some brilliant business model. And yes, every manager on CNBC says to invest in them… gee, I wonder why?
Amazon will pevail. I can't wait for them to accelerate their advancements in disturbing Apple's monopoly on the music and tablet industry. I've been waiting and hoping for Amazon to drop to $180 to get in. It might go a little lower but, based on my research, now is the time to get in. Still, a lot of people are afraid of the big bad Apple so while many people are buying Amazon, articles by shorters like this are scaring people off. The result? Amazon has been fluxuating around the high 170's.
I'm loading up on Amazon. It has a huge net worth, a name, and a business model that screams long term growth.
The author's opinion is far from true. AMZN does not want to position Fire against iPad. If they wanted to, AMZN could segment the Fire and put up another high end version of Fire to fight with iPad. They don't do that coz their agenda with iPad is different from what poor author has daydreamed :)
Amazon isn't a growth stock? They're a $50b company that's growing between 30-40% a year. Additionally the Fire is really just an experiment by Amazon. They are doing a LOT of other things, the least of which is retail. For example their burgeoning publishing business, their slow takeover of Akamai's web caching business, their web services that are doubling in volume every 9 months, and a whole bunch of business acquisitions- many of which are growing as fast as the mothership.
I agree they're overvalued at the moment, but with growth like that, that may sustain for another 5 years, they will be worth much more than their current stock price.
All I can say is WOW, maybe you should know more about the business your writing about before publishing articles like this! You obviously haven't a clue!
AMZN may have quite a good linear growth into the future.
AAPL, on the other hand, is guaranteed to have a spectacular exponential growth.
I know which one I am putting my money on.
AAPL, on average, adds a good 1% every working day.
In a year, this represents a 200+ percent increase.
The only thing better than tripling my money in a year,
is to watch it go NINE fold in two years.
The article is very one-sided (bias towards the "greatness" that is Apple), though not an Apple enthusiast, I do acknowledge Apple's skill in leveraging multiple innovations for overall success in the market. This article, filled with one-handed general sweeps of praise without any attempt of neutrality, however, made me want to put off the entire brand all together.
Other than that, it failed to recognized that the Amazon Kindle is first and foremost an e-book reader. The introduction of the Fire to the Kindle Family adds the option for users to view more multimedia content. While it's ability to install apps allows it to be somewhat comparable to other tablet devices, the Fire's UI is specifically designed to enhance e-book READING and PURCHASING (from Amazon's known-for book selection) — something both iPads and Android tablets alike are not optimized for.
The markets are similar but not equivalent.
I would have thought the writer would have done more research before blatantly giving uninformed stock advice on any products and markets.
Amazon isn't a growth stock? Its sales growth in 2011 was 35%, and nearly 40% in 2010. Not growing? amazon prime will probably have nearly as much streaming content as Netflix by the end of 2012. Its fire tablet is designed to be an Amazon media platform not some general purpose tablet. Its a niche product and it was a brilliant move because people looking for cheap tablets now have a devise that links them into Amazon's other content.
As for apple's ipad 3, the leaked specs don't even make it better hardware than stuff you can currently buy that run android, and when windows 8 rolls out on tablets in Q3/4 of 2012 they are going to have to compete in the enterprise market as well.
Speaking as someone working in the publishing industry, I think the writer of the article is missing the point that the Fire is for reading digital books. The iPad is far too big, heavy, and unwieldy to hold for several hours of comfortable reading. This is the Fire's strength. It's better than the Nook, as well, because the Amazon store is much better organized and easily navigable than the BN online store, and don't even get me started on the Apple store, which, frankly, stinks. For the rapidly growing digital book market, the Fire is the #1 choice, Amazon is the #1 digital bookseller, and I feel confident that in the long run, Amazon's choices will be justified and rewarded.
Regardless of future growth that can be argued for apple and amazon the main point is simply that:
Amazon's current P/E ratio is 180 and their margins (please mark my words on this) will never ever ever go above 5%.
Why? Because amazon is a retail company and retail companies have extremely low margins (wal-mart has 4% margin just like target and other retailers do).
Apple's itunes and appstore are not margin creators and also have very low margins.
This being said, people investing in this stock are all blinded by amazon's CEO personality and need to stop believing in fairy tales because regardless of how you sell products, retail is simply a low-margin business.
On the other hand, innovating new high-tech and high-design hardware on a constant basis appears to be a business that pays off massively for Apple. (note: Samsung is also getting quite good at it although their overall margin is negatively impacted since they play in the full spectrum of handsets and cut prices to compete with apple)
This being said it is up for each one to decide where they put their money (assuming both companies will keep growing on the double digits):
1. Amazon with a 180 P/E ratio and low or zero profit margins
2. Apple with a 14 P/E ratio huge pile of cash (enough to buy amazon) and very high profit margins
Cheers