In a previous Seeking Alpha article, I argue that Amazon.com's (AMZN) all-but-certain tablet foray does not represent the tossing of a competitive salvo from Jeff Bezos at Steve Jobs. A recent note by Detwiler, which I discovered via Barron's, highlights the street's misconceptions regarding Amazon and Apple (AAPL). As valuable as Detwiler's note is, it risks allowing investors to follow the flock to an uncritical consensus. If you consider what's happening in a somewhat novel way, I think you can set yourself up to profit from it.
As I contended in the above-referenced article, Amazon wants no part of competing against Apple; instead, it simply wants to do what it can to drive business back to its e-commerce core. Amazon did not get to where it is today by recklessly taking on battles it simply cannot win. From a competitive standpoint, Amazon's streaming moves could mean more to Netflix (NFLX) than to any other company.
Here's a screen capture of the Detwiler note, released this past Friday.
[Click to enlarge]
Detwiler takes a sound approach, speaking of Amazon's "Hollywood" tablet not as a direct competitive shot at Apple but as an offering that will fill a "niche" on the low-end behind iPad. This strategy helps explain why Amazon remains a consistent winner and companies like Research in Motion (RIMM) appear destined to be perpetual losers. By filling this niche, it seems to me that Amazon almost explicitly says, "We're not competing with Apple." Rather, the company plans to offer a targeted device -- one that doubles as a reader and content streamer. It's much easier to capture a market this way than to position oneself as the same as or somehow "better" than iPad, as RIM and others do. Simply put, Amazon's smart; it takes what Apple effectively gives it.
That said, people will read notes like Detwiler's, miss the ball, and simply accept the conventional wisdom that Amazon looks to compete wiith Apple.
Amazon tends not to do something unless it drives business back to its core. Consider earlier efforts like Prime and Subscribe & Save, current initiatives like Cloud Drive and Instant Video, pilots like Amazon Fresh, and upcoming endeavors like the "Hollywood" tablet. Each one presents a potentially lucrative revenue stream, but on their own or as presently structured, not a single one of them will knock the obvious and top competition in each space out of business. They probably won't even make a dent.
All Amazon really wants is to drive people to its website so that they will either become new Amazon customers or shop at Amazon.com more than they otherwise would. Prime and Subscribe & Save are gimmicks, just like the supposedly egalitarian $114 Kindle with Ads. These things hook you with the feel-good notion that they will save you money. They will not; rather, they're cleverly designed to make you spend more.
Amazon Fresh undoubtedly attempts to not only get a larger sliver of your grocery money, but upon a large rollout, it could boost Amazon.com's general sales revenues. Just have a look at the site -- operational, for all intents and purposes, only in the Seattle metro for now. It aims to drive business to Amazon's core using Fresh as the vehicle. Clearly, the potential exists for tie-ins beyond the ones presently in place.
Cloud Drive, Instant Video, and a "Hollywood" tablet all have built-in mechanisms (even if subtle) to get you to spend more time at Amazon.com and/or increase the number and frequency of purchases you make at Amazon.com, as already stated. If these drivers turn a profit, it's icing on the cake. One thing's certain: Amazon will make sure that any money lost on these additional revenue streams is money well spent (e.g., the Lady Gaga promotion). And any money lost will pale in comparison to Amazon's behemoth overall bottom line.
Amazon has the luxury of a war chest of cash. Poke around the company's latest annual report: There's no debt to speak of and billions in cash and cash equivalents. It can afford to take strategic losses and ramp up capital expenditures to grow its business. Amazon boasts excellent numbers related to ROI. Instead of focusing on some imagined battle between Amazon and Apple, investors should look to where Amazon could inflict some real pain if it makes the choice.
While it has received some attention, the notion that Amazon could squash Netflix like a bug deserves more play. I am not sure Amazon wants to get into the thankless and unsustainable business of paying for content year-in and year-out. It's part of what lends support to my thinking that the Instant Video and streaming tablet efforts exist simply to drive business to Amazon's core businesses. That said, Amazon could -- if it is not already -- make life a living hell for Netflix.
Consider the concession Netflix CEO Reed Hastings made recently that the company cannot write large enough checks to make a deal with the likes of HBO. While I'm not sure HBO would give Netflix anything other than scraps anyway, one thing's certain: Amazon can write big enough checks to secure content from HBO, for example. It can also feign the desire to write big enough checks to make Netflix pay more for the content it desperately needs to maintain and grow its subscriber base. By creating a bidding war and overspending -- and even taking a loss, like it did on the Lady Gaga deal -- on content acquisition, Amazon can achieve one or both of two objectives:
- It can severely disable or put Netflix out of business.
- It can steal Netflix customers, who it can turn into new or more frequent Amazon.com shoppers.
As it stands, Amazon's streaming video efforts simply do not stack up to what Netflix offers.Today, Netflix provides an offering that is superior to Amazon's present slate. If, however, it wants to, Amazon could profoundly alter that landscape overnight. In a bidding/spending war, Netflix does not stand a chance. Google (GOOG) could produce the same impact. I am not sure Amazon wants to fight this battle, but I am confident that it's more willing to rumble with Netflix (a battle it can easily win) than it is with Apple (a battle it knows it cannot win).
From an investment perspective, this line of thinking reaffirms my bullishness towards AAPL and AMZN and my bearishness towards NFLX. Apple dominates the gadgets business; everything it does drives customers back to that core. Amazon dominates the e-commerce business; everything it does drives customers back to that core. Both cases represent pretty clear strategies. I want to be long companies who properly size up the competition, operate effectively alongside it, and focus on whatever their competitive advantages are. Netflix is a company that has much less control over its competition and its core business, particularly when held up against Apple and Amazon. For the reasons outlined here and elsewhere, I maintain my bearish tone vis-a-vis NFLX.
Coupling these strategies -- long plays on AAPL and AMZN and a short play on NFLX -- however you decide to play them, makes most sense. Many investors tend to take a singular view of a call on a stock's direction. You must consider the whole. Pretend you're running a fund. As long-time NFLX bear, Len Brecken told me the other day, "I'm down on NFLX, but [my portfolio] contains other positions that are up," more than offsetting on-paper NFLX losses. And, of course, investing is not a passive activity. When AAPL and AMZN show weakness or NFLX shows strength, be proactive by either hedging against or pulling back on your core, long-term sentiment-driven positions.