Prior to this past holiday season, Amazon (AMZN) marketing executives blitzed the airwaves with a series of commercials comparing the Kindle Fire HDX 8.9 against the Apple (AAPL) iPad Air. Interestingly, the new Amazon commercials featured a similar format to that of Apple’s iconic “Get a Mac” campaign that aired between 2006 and 2009. The Amazon commercials now also presented product above a plain white background in conjunction with upbeat elevator music and a monotone voice over. Ironically, Amazon has now effectively cornered its own self as a braggart copycat. As a fast follower, Amazon will be unable to challenge what Warren Buffett may refer to as the Apple “moat.” Prospective technology investors may recognize Amazon as a poster child for Web 2.0 bubble economics. Alternatively, Apple remains a screaming bargain, in comparison to head scratching Amazon stock valuations.
Tablet Specifications
Again, the latest round of commercials out of Amazon directly compared the Kindle Fire HDX 8.9 against the Apple iPad Air. Amazon begins by playing up the idea that its Kindle high-definition screen presents one million more pixels than the iPad Air with Retina display. Amazon then went on to suggest that its Kindle Fire HDX 8.9 is 20% lighter than the iPad Air. The commercial, of course, closed out with its punch line price comparison. The Apple iPad begins at $ 499, while the Kindle Fire HDX 8.9 begins at $ 379. Apparently, the choice was been made clear for consumers to purchase the “sharper and lighter” Kindle Fire, for $ 120 less than the competing Apple iPad Air. Advertised statistics, however, often lie.
A brief review of information posted to Apple and Amazon company websites may reveal certain discrepancies between the aforementioned advertised specifications and reality. The iPad Air (9.4 “x 5.6″ x 0.29 “) and Amazon Kindle Fire HDX (9.1″ x 6.2 “x 0.31″) are of similar physical dimensions. The Amazon Kindle Fire HDX (384 grams) does weigh in at 85 grams less than the iPad Air (469 grams). Still, this statistic is somewhat misleading because the Amazon shell is made largely of plastic, while iPad Air tablets are assembled with aluminum casing. As such, the feel of Amazon Kindle may be described as flimsy, if not cheap, when held alongside the sleek, yet durable iPad Air. The 9.7 “Retina Display of the iPad Air presents graphics in 2048 x 1536 resolution at 264 pixels per inch. For the sake of comparison, the Amazon Kindle Fire HDX features a smaller, 8.9-inch screen that does display images in 2560 x 1600 resolution at 339 pixels per inch.
Google (GOOG) engineers have customized the Android system specifically for Amazon users to operate the Kindle tablet. Consumers who favor iOS are also buying into a popular, yet walled off ecosystem that includes the iTunes, iPhone, and Mac platforms. Developers, such as those working at messaging application company Snapchat, typically launch “killer” apps at the Apple Store first, before making the programs available for Google Play Android users. For now, Apple remains the alpha dog on the technology block. Pricing power is an obvious manifestation of the corporate pecking order.
Interpreting Market Share Data
Be advised that Apple, Google, and Amazon business models are somewhat divergent from each other. Apple, as a vertically integrated technology company, aggressively turns profits off component parts, software, and hardware. Alternatively, Google and Amazon are effectively bait-and-switch operations that may give away product at cost, in order to drive traffic towards comparatively higher-margin search and online retail operations. Apple stock market and overall business performance is more so directly correlated with hardware profit margin results. Google and Amazon core business performance, however, shall not be confused for original equipment manufacturer sales figures. Google and Amazon have historically expanded market share penetration, at the expense of profit margins, while Apple has largely remained above the fray, in terms of engaging rivals with costly price wars of any sorts.
On October 30, 2013, research firm International Data Corporation (IDC) released a report summarizing global tablet sales for calendar Q3 2013. IDC identified the most prolific tablet manufacturers as Apple, Samsung (OTC: SSNLF), Asus (OTC: AKCPF), Lenovo (OTCPK: LNVGF), Acer (OTC: ACEIY), and “Others.” IDC defined its “Others” as an umbrella category above the likes of Amazon, Microsoft (MSFT), Dell (DELL), and Hewlett-Packard (HPQ) . Over the past year, Apple share declined from 40.2% to 29.6% of the tablet market. In terms of unit shipments, Apple iPad year-over-year sales grew by 0.6% to close out Q3 2013 at 14.1 million. Meanwhile, the IDC “Others” category achieved 25.0% growth through the same 12-month time frame. For Q3 2013, IDC estimated that “Others” were responsible for 16.8 million unit shipments. Still, Apple has maintained its pricing power over the years and continues to generate and collect the Lion’s share of profits available within the mobile space.
Apple iPad Sales Performance
| 2009 | 2010 | 2011 | 2012 | 2013 | |
| Apple Revenue | $ 42.9B | $ 65.2B | $ 108.2B | $ 156.5B | $ 170.9B |
| iPad Revenue | – | $ 5.0B | $ 19.2B | $ 30.9B | $ 32.0B |
| iPad Unit Sales | – | 7.5M | 32.9M | 58.3M | 71.0M |
| iPad Revenue Per Unit Sold | – | $ 666.67 | $ 583.59 | $ 530.02 | $ 450.70 |
| iPad Percentage of Apple Revenue | – | 7.7% | 17.7% | 19.7% | 18.7% |
Apple iPad prices now range between $ 299.00 for the 16GB Wi-Fi iPad Mini, and $ 929.00 for the fully-loaded 128GB Wi Fi + Cellular iPad Air with Wi Fi and cellular connectivity. For the sake of comparison, Amazon Kindle hardware begins at $ 69.00 for a 6 “Wi-Fi e-reader and ends at $ 579.00 for the 64GB Kindle Fire HDX tablet with Wi Fi and Cellular connectivity. Be advised that Apple iTunes revenue also grew by 25% from $ 12.9 billion to $ 16.0 billion between fiscal 2012 and 2013. Language within Apple’s latest 2013 annual report suggested that consumers were purchasing older, marked down product, instead of exiting the Apple ecosystem, altogether. In effect, Apple is more so likely to cannibalize its own sales than it is to be outmaneuvered by the likes of Amazon.
On November 5, 2013, research firm IHS iSuppli released its latest teardown results for Apple iPad Air costs. Andrew Rassweiler, IHS senior director, then observed, “While the iPad Air slims down in size, the profit margins are getting fatter.” Rassweiler and the IHS report intimated that Apple had successfully leveraged its buying power to drive down the component part costs across the iPad and iPhone product lines. HIS iSuppli estimated a 6% drop in year-over-year bill-of-materials (BOM) costs for the 16GB Wi-Fi + Cellular iPad Air model, in particular. According to iSuppli, the 16GB iPad Air with cellular connectivity carries a $ 304.00 BOM and retails for $ 629.00. The 128GB Wi-Fi + Cellular iPad Air version retails for $ 929.00, although Apple pays only an additional $ 50.80 in NAND Flash costs to offer the extra storage. Again, the Amazon Kindle will be no Apple iPad Killer.
The Bottom Line
The Federal Reserve Board lowered its federal funds target rate to an unprecedented zero in response to the 2008 credit crisis and housing bust. Since then, the Federal Reserve Board and US Treasury have also added the Troubled Asset Relief Program and Operation Twist to the financial lexicon. In summary, the Federal Reserve Board has committed itself to purchasing government bonds, in order to literally flood financial markets with liquidity and attempt to stimulate the economy. Federal Reserve Bank of New York President William C. Dudley recently admitted:
We don’t understand fully how large-scale asset purchase programs work to ease financial market conditions.
Certainly, Amazon stock has benefited as one receptacle for speculative capital. Amazon shares closed out the January 13, 2014 trading session at $ 390.98. Wall Street traders have effectively slapped a $ 180 billion market capitalization price tag onto Amazon’s business model. Amazon, however, actually racked up $ 41 million in losses upon $ 13.8 billion in fiscal Q3 2013 net sales. Amazon has banked a mere $ 34 million in net income of $ 39.8 billion in revenue through the first nine months of fiscal 2013. Granted, this performance was a significant improvement above fiscal 2012, when Amazon had already lost $ 137 million after three quarters of doing business. In comparison to market capitalization, however, Amazon financial results may be described as dangerously meager, at best. A relatively lukewarm reception to the Kindle tablet may not spare Amazon shareholders from what appears to be the inevitable. Amazon investors should consider selling out and taking profits immediately, in order to avoid a severe asset price correction within shares of this online retailer.
Apple stock literally trades for bargain bin prices when compared against Amazon. Apple’s current $ 535.73 share price also calculates out to nearly $ 485 billion in market capitalization. Apple did close out its latest 2013 fiscal year ended September 28 with $ 146.8 billion in cash and investments above $ 83.5 billion in liabilities. Apple liabilities then included $ 10.1 billion in deferred revenue, which will inevitably fall off the balance sheet and transition over to the income statement. Apple may then be left with $ 73.4 billion, or roughly $ 80 per share in net liquidity, after paying off all debt. Wall Street traders are therefore valuing the Apple business at slightly more than $ 450 per share, or a mere eleven times current earnings. Going forward, Apple has already announced its intent to return $ 100 billion back to shareholders, in the form of stock buybacks and dividends, by the end of 2015. Activist investor Carl Icahn has described his recent decisions to purchase billions of dollars worth of Apple stock as “compelling” and a “no brainer.”
Apple is a solid, long-term buy.
Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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