Apple (AAPL) investors were forced out of positions after a JP Morgan report indicated a 25% decrease in Apple’s iPad 2 orders from Foxconn in China (click here). The media ran wild with the story, speculating that Apple is experiencing an unprecedented global slowdown and that they might even be forced to cut the price of the iPad 2 because of it.
However, it appears that the report was irresponsibly written because it failed to account for Apple’s supply deal with Foxconn in Brazil. Reports out of Brazil indicate that the new plant is ready for a 2011 iPad ramp (click here). The diversification away from 100% Chinese manufacturing is a wonderful piece of news for Apple but for one day at least, it is being reported with only half of the facts. Don’t think for a moment that JP Morgan simply made an honest mistake. There is no coincidence that this story gets released on the Monday before Amazon.com’s (AMZN) tablet event. JP Morgan operates with the same kinds of conflicts of interest that all the other banks deal with. We live in a hedge fund world. As a result, Apple stock gets hit with another unjustified sell-off. We sold our "easy money" iPhone 5 catalyst allocation this morning but will reinvest as soon as the story clears out. Unfortunately, it’s difficult to correct a misleading story once the national headlines get a hold of it. We’ll wait for the dust to settle.
As for the Amazon news, this Wednesday the company will hold a media event to unveil a touchscreen Kindle color tablet. What’s our take on this new product? We’ll reserve final judgment until we see the device but there are a number of disconcerting variables to consider.
The current version of the Kindle sells because it is extremely cheap at $114 and because its screen utilizes the grayscale e-ink technology. The e-ink technology is very similar in scope to the former advantage claimed by Research In Motion (RIMM) regarding the physical keyboard that Blackberry users ‘refused’ to give up because of mobile email. Both technologies were a nice short term niche but fell short of critical mass appeal over the long run. When Research in Motion finally pushed into the touchscreen space it marked the beginning of the end for its stock. The same thing could happen to Amazon as it turns the Kindle into a color touchscreen tablet. The current version of the Kindle looks and feels like an oversized calculator. Can these guys really create a dynamic piece of hardware that can sell for anything north of $200? As Amazon tries to expand beyond an e-reader they are entering uncharted territory.
My father in law is a college basketball coach and even at the division 1 level he deals with parents of players who think that their son is better than he is. Almost every guy sitting on the bench believes he deserves to start and those who don’t play can do a great deal of harm to team chemistry when they think they’re better than they are. Coach was telling me the other day that sometimes the best thing you can do with a disgruntled player/parent is to give them exactly what they’re asking for. Put the kid in the game. Let him get beat on defense, turn the ball over, or air ball a shot and the chirping from the bench will turn to silence.
This Wednesday is Amazon’s opportunity to enter the game and play with the starters. I am extremely leery of Amazon’s ability to compete at that level. During Amazon’s one year stock rise from $125 to $225 it has been given a free pass from scrutiny because it never claimed to compete directly with Apple. If we were to ask the CEO’s of Microsoft (MSFT), HP (HPQ), Palm, Dell (DELL), Research in Motion, Nokia (NOK), Sony (SNE) or any other direct Apple competitor they would tell you that the best strategic move made by Amazon CEO Jeff Bezos was to become a partner with Apple rather than a direct competitor. On the Amazon website a list of bestsellers reveals the 21.5 inch iMac to be Amazon’s top selling desktop and the 13.3 inch Macbook Pro to be the best selling laptop.
Today Amazon stock commands a p/e ratio of 100 and a forward p/e ratio of 70. As Amazon re-brands itself as an Apple competitor and aligns itself with the Appstore for Android it is at serious risk of shrinking on the big stage. Wednesday is likely to be a turning point for Amazon but probably not the kind of turning point they had in mind. Because of Amazon’s high valuation, it will be difficult to stand up to the scrutiny that is quickly headed its way and this stock is at risk of becoming a prime target of short sellers. Bezos would be much better off to continue flying under the radar by simply announcing an upgrade the current Kindle and keeping it priced at $114.
Disclosure: I am long AAPL.