Back in August, we made a list of companies that were collateral damage of Apple’s Creative Destruction. That eventually morphed into a Washington Post column, And then there were none: Apple's destruction of rivals.
The latest victim of the Apple machine? Amazon.com.
The numbers were pretty awful. Q3's profit disappointment missed by 42%, and that number was, according to Bloomberg, “the biggest negative surprise of any technology business in the Standard & Poor's 500 Index.” The loss sliced nearly 20% off of its market cap, whacking $20 billion from over a $110 billion cap to under $92 billion.
And next quarter isn’t going to be any better. Projected Q4 losses on the Kindle Fire alone are $200 million dollars; (JPMorgan thinks Amazon can sell 5 million Kindle Fires in Q4) Amazon may be subsidizing the Fire anywhere from $10 to $100 — in the Holiday sales season, the losses are going to amount to a lot of red ink.
I have been an Amazon fan since my geek college roommate gave me a gift certificate for the holidays around 1997. I am a good consumer, a loyal Amazon customer who spend an awful lot of money there each year. I find its free shipping, huge selection and customer service (got to have the magic phone number!) mostly delightful. But Valuation and Accounting have always been Amazon’s Achilles heel. Now it seems as if both of these factors are going to be a drag on what looks like a pricey stock.
Amazon says its building for the future, and to some degree, that has been true. The problem is its been true for 15 years, and the future has pretty much arrived. They must be referring to the next future, the one that is another 15 years off in, um, the future.
Question is how much patience investors have these days.
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Sources: Amazon's Apple War Costs Investors $20B Danielle Kucera Bloomberg October 26, 2011 http://www.bloomberg.com/news/2011-10-26/amazon-s-apple-war-costs-investors-20b.html
Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data, ability to repeat discredited memes, and lack of respect for scientific knowledge. Also, be sure to create straw men and argue against things I have neither said nor even implied. Any irrelevancies you can mention will also be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.
Let’s compare: Amazon is selling Kindle Fire at a loss to get the revenue from selling content to its users.
Apple sold iPods to get revenue from music and iPhones, in part, to get revenue from apps. But didn’t Apple sell both iPods and iPhones at a profit? Seems like Apple has a better business model, unless Amazon gets a lot more revenue from Fire and/or has greater margin on that content. It doesn’t look like either is true at this time.
“Amazon says its building for the future, and to some degree, that has been true. The problem is its been true for 15 years, and the future has pretty much arrived.”
Thank you Barry. This is what people don’t seem to understand. 30% top line growth is fantastic, but if you aren’t making any money it probably isn’t a good investment.
AMZN was trading at 100 P/E before this announcement, and that’s with razor thin profit margins which may actually go negative in the near future. And of course, no dividend. As a value investor, I have to say AMZN is one the of the most expensive stocks I’ve ever seen. Yet whenever it plummets on quarterly results, “investors” seem to step in quickly to pump it up some more. It reminds of the dot com bubble days.
Apple didn’t cost investors $20B. Irrationally exuberant investors turning an 80-PE stock into a 100-PE stock cost investors $20B.
>> Amazon says its building for the future, and … years off in, um, the future.
Reminds me of Karl Denninger describing how as an ISP operator in the late 90′s he had to “bet the business” every few quarters on new technology in an ever-escalating bandwidth/price war with competitors.
Compare that with this situation. Amazon and Apple both want to be first in front of the user’s face, because they then get to steer customers to *their* clouds of digital content. The battle for the user’s eyeball is migrating off the desktop onto mobile devices, where Apple has substantial control. If Amazon doesn’t “bet the business” here, maybe Apple sells the music, videos, books — and, later, more expanded inventory — Amazon would’ve sold.
IMO, the antitrust department should prevent this much vertical integration. Separate hardware makers from online stores.
but business is booming:
“During a conference call with analysts, Amazon Chief Financial Officer Tom Szkutak said the company ended last year with 52 shipping centers, and is on track to add 17 more this year.
Amazon had previously forecast the opening of 15 new centers this year, but said Tuesday that expectations for future growth spurred it to add more facilities to its plans.
“We’re seeing really unprecedented growth,” Szkutak said during the call. “So with this strong growth we’re investing in a lot of capacity.”"
margins shrinking… make up for it in VOLUME? ;-)
disclosure: no AMZN position – love the company as a consumer – and I think they’ll be around for a long long time. I think i’ll buy my electricity from AMZN at some point…
Despite the Fanbois’ tendency to see the world through Apple-tinted glasses, Amazon has alway had thin margins, as someone else pointed out. That was one of its problems in the tech bubble: plenty of growth with no profits. And, competes in a number of areas besides the rather specialized consumer electronics Apple offers.
It competes against Netflix, Vuudu, Apple (small potatoes in video) and cable on demand in streaming video. It competes against B&N and formerly Borders in hardcover and E-books. It competes against numerous other internet and brick and mortar businesses in computers and electronics, e.g. Newegg, Best Buy, and even Walmart, kitchen gadgets (just ordered a new Krups coffee grinder as our 25 yr old one is starting to crap out and no one sells them locally) and it even sells coffee. Retail is a tough business.
buying oppourtunity. …Comparing EVERY company to Apple is a bit unrealistic. As China’s top man once famously said “Unfair trade? Apple Ipod retail $300. Cost for us to produce $20. Steve Jobs take home difference. No jobs in America? Call Steve not us”. (<—slight embellishment but you get the point. This sort of low cost to produce vs. the ability to slather huge mark ups onto the massive audience of fanboys from toddlers to seniors is perhaps a once in a life time event. Unless you are the type of Enron investor who sinks all his money into the company he/she knows best then you would be wise to see that consumers will have to turn to other brands as well. One company can't deliver it all. As Apple and Android duke it out for global market share(a battle that Android will eventually win – the Titanic vs a speed boat) Amazon will be waiting in the wings to sell to both because I-tunes sucks, a god awful monster, and e-commerce the Amazon way is here to stay. Steve is gone and I doubt that there is anyone at Apple who has the vision to undo all of Bezos' decade of work. The Kindle Fire will be a big seller, mostly because Apple refused to adapt a smaller device Ipad sooner, and like Google, the Kindle ability to spread user information and content to multiple devices, without annoying Apple like compatibility issues, will perpetuate repeat sales for content. The simple reality is that margins in a ditigal world will be getting tighter. Apple sustaining these huge profitability advantages will not last forever. The list of features that Apple devices have that Android phones and tablets do not have is a list that is shrinking by the hour. It's going to be hard to keep asking their customers to fork over so much when other devices get the job done and deliver the same Amazon content just as well. The fact that Samsung is already putting together better hardware on their tablets (betters displays, lighter, thinner and with 4G 10-15x's the speed of 3G) means that Apple is going to have to contend with some higher costs eventually: 4G capable long-lasting batteries and large retina displays arent' going to come as cheap as you see with the Ipad2 and their now nearly three year old hardware.
So, I look at the monthly chart screen grab that Mr. Ritholtz placed in the post and I ask myself:
“Self, why is it that AMZN, a retailer, tripled in 2003, traded within a ‘narrow’ range (with downward bias) from 2004 to mid 2007, and then spiked (?), pooped out and then went parabolic Dec 2008/Jan 2009 (inexplicable) a moonshot that has lasted for 34 months- a period which is marked by a contraction in consumption? How are the numbers possible? 2004-2007 is Era of MEW, of HELOCs out the waz(ew), unsustainable, credit driven binge buying and AMZN is rolling between 27 and 54? Huh?
How did this recent price get constructed? Who is a buyer of AMZN above 200? What does one say as the finger (an institutionally fat one?) hits the buy button.
100 P/E? Huh? Does anyone do any risk analysis? Or is the best thing about OPM that well, it’s OPM, and burns so brightly, and smells so sweet?
At $200 it competes in price to the $500 iPad, but it also competes with the smaller iPod at the same price. - The question is how many books or paid games and apps will the user purchase? - At what point with Amazon make a profit: 2 books, 4, 6, 8…?
Apple is not covering all demographic with their $500 price point. I’d say the market is at least double in size at the $200 price point, it may actually be 10x larger.
At $200 you can justify a Kindle as an electronic book reader, to store 100 books. It may be Apple that has to respond to the Kindle.
AMZN (the company) will be here 5, 10 and most likely 15 years from now. The stock may be going nowhere fast but, like WMT, AMZN will grow sales and earning.
Will AAPL be around in 5, 10, 15 years? Yes it will. But will it be Apple of 2010 or Apple on 1996? The *only* reason AAPL is able to sell products like their 1st iphone (no 3G, crappy camera, no memory slot) for that outrageous price is because of Steve Jobs’ “fanboys” who would buy anything and everything regardless of the need, the price and competition. Only Steve Jobs could convince people that he sells them “freedom” (from Big Bad Microsoft?) while in reality locking them up in his own “Apple Eco-system?”
Without Jobs, will the “fanboys” keep buying every model of iPhone, or perhaps skip a generation? Without the Jedi mind tricks, will they still sign up for the cyber-prison of iTunes? Will they still pay $100 for additional 16GB of flash in the iPhone, when 16GB flash card cost $15 on amazon and can be used in any Android phone????
Correct me if i’m wrong, but the final, the “ultimate”, the most user-friendly computing device shown to Jobs during his visit to Xerox PARC was… a hand-held tablet-shaped computer with touch-screen interface. If i remember correctly, that was *it*. The end of Xerox’s research. I wonder if in the next 2-3 years Apple can come up with anything other than evolutionary products… not really worth of price premium.
Amazon is trying to pull a Google.
Google clued in early that cloud/mobile was the future. They couldn’t cede a future where they had to pay Apple a vig to to get to their customers. Digitizing the world, and selling access to the customers is Google’s DNA. Getting between Google and the users is like getting between a dog and its bone. So they came up with Android. For all the hoopla about iPhone, Android is selling more devices, and the Samsung Galaxy S II is arguably as slick or slicker than iPhone 4. (no Siri and not much of a tablet splash – yet).
Now Amazon is, among others, in the business of media distribution. If iPads and Android tablets take over the world, how long will it be before everyone is buying ebooks and movies directly from publishers on their iPad, and disintermediating Amazon?
So you have 3 business models – Apple makes money the old-fashioned way, by selling premium slick hardware, with an assist from media and software through iTunes. Google gives the platform to hardware manufacturers for free and sells access to the users. Amazon wants to own media distribution and retail on the device. (I can easily see them buying Netflix). They are basically a software as a service platform for retail and media distribution and for that matter any online business.
I don’t know which one dominates, they might coexist for the long term. I think what Amazon has done in the SAAS/retail business is stunning but they’re in a narrow-moat low-margin ghetto, stock is expensive, and not at all clear they can extend their model to become a top-tier device player.
btw, I think if Samsung can sell their 7″ tablet for about $300 (eventually) it will be a much better value than the Kindle Fire by a wide margin. The Samsung tablets allows blue tooth tethering to your non-apple phone or laptop so you can keep using your browser once you’re out of wifi reach. And the storage is not even close, the Kindle will not allow you to store a very extensive list of movies and TV shows. And if the 7″ Samsung is anything like the razor thin 10″ on and size and form factor then it beats the Fire on portability as well. And of course Android Market has not expelled Kindle in App book purchasing like the Apple unfair trade committee has, so you get the same experience with the Fire as you would with the Samsung as far a purchasing Amazon Kindle content. One advantage of the Fire is text to speech. That’s a very under rate (and free) feature for listening to magazines, blogs and books that do not have an audio book version.
[...] Barry Ritholtz, “Amazon says its building for the future, and to some degree, that has been true. The problem is its been true for 15 years, and the future has pretty much arrived.” (Big Picture) [...]
“The *only* reason AAPL is able to sell products like their 1st iphone (no 3G, crappy camera, no memory slot) for that outrageous price is because of Steve Jobs' "fanboys" who would buy anything and everything regardless of the need, the price and competition.”
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