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The big market news on Wednesday was's (NASDAQ:AMZN) release of a new tablet, the Kindle Fire, in an effort to compete with Apple's (NASDAQ:AAPL) iPad. Investors and analysts have instantly rushed to determine whether Amazon can challenge Apple's tablet dominance, where companies such as Hewlett-Packard (NYSE:HPQ) and Research In Motion (RIMM) have failed.

Investors have so far cheered Amazon's move, which is up 3.7% as of this writing, while Apple stock has stayed flat.

Quite honestly, I am not concerned with the effect on AMZN stock, as I feel the same way about stocks with a P/E of 98 that I do about reality television shows: I realize some people enjoy them, but for the life of me I cannot understand why.

I am interested, however, in the effect on AAPL stock, which boils down to two questions: Can the Kindle Fire compete with the iPad? And what effect would that have on Apple stock? In order:

1.Can the Kindle Fire compete with the iPad?

Of course. Yes. Maybe. Sort of. Despite the initial hoopla, and sales estimates as high as five million according to the New York Times article to which I linked in the opening sentence, no analyst has yet seen, felt or used the device, leaving many of us guessing as to its actual competitive abilities. We do know that the Kindle Fire's $199 price tag is meant to undercut the $499 iPad. Clearly, Amazon intends the device to be used as a loss leader, hoping to make up what it loses on the device in sales of music, games and video to its users.

That said, the Kindle Fire must be priced dramatically below the iPad, because it is an inferior product. Even Jeff Bezos knows this, though he would be unlikely to admit so publicly. For one, the Kindle Fire has a 7-inch screen, relative to the 10-inch screen of the iPad. (Remember that screens are measured on a diagonal, so the iPad's screen is actually roughly double the size of the Kindle Fire.) No less an authority than former CEO Steve Jobs once derided the notion of a 7-inch screen, calling it "dead on arrival," noting that it was too small to compete with a 10-inch tablet and too large to challenge smart phones. (H/t to SA commenter mack520 for bringing this to my attention, in the comments section of this article.)

Perhaps more importantly, the current edition of the Kindle Fire lacks the ability to connect to cellular wireless networks, and can only access the Internet over Wi-Fi networks. While later models may offer this functionality, this initial defect would seem to limit corporate adoption of the product, something that has driven iPad sales. (According to the company's Q3 conference call, 86% of the Fortune 500 is either testing or deploying the iPad for business use.)

In terms of functionality, it seems likely the Kindle Fire will fall short as well. Amazon released a new browser - named Silk - that will offer Web capabilities on the device. However, from an application standpoint, there is simply no way that Amazon will be able to offer the variety of games and apps that Apple does through its App Store. (There are over 100,000 iPad-specific apps in the App Store, according to Tim Cook in the Q&A of last quarter's conference call.) There is also the worry of first-run glitches that seem to plague so many tech rollouts (except, seemingly, for Apple products).

In short, despite Amazon CEO Jeff Bezos' claim that the company will produce "premium products at non-premium prices," there is seemingly little or no chance that the first edition of the Kindle Fire will compare favorably to the iPad. Based on what we know now, we can only assume that the Kindle Fire will be a lower-end product, sold at a low-end price, to consumers who can accept a limited version of the tablet. Given the massive rush for discontinued HP TouchPads, which sold between $99 and $149, this may be a successful strategy.

2. How will this affect Apple?

The first question Apple investors need to ask is whether Kindle Fire sales will cannibalize potential iPad customers, or simply offer an alternative to consumers who are willing to pay $200 for a tablet, but not $500. The answer is obviously a little bit of both; but how much of which?

It's worth noting that Apple products always sell at a premium. Apple laptops are priced around double those of Dell (NASDAQ:DELL) or HP. The iPhone debuted at $600, and still sells for prices above those of competing products from Nokia (NYSE:NOK), RIM and Samsung. Apple's brand, reputation for quality and premium products have enabled the company to maintain these prices and tremendous growth. (I've mentioned it before, but it bears repeating: Last quarter, Apple grew quarterly revenue year-over-year by over 75% from a base of nearly $16 billion, one of the seminal achievements in the history of American business.)

However, let's assume that Apple must cut the price on the iPad to compete with the Kindle's below-cost pricing. The company sold 9 million units in Q3, and expects growth. At an annual run rate of 40 million iPads, a $50 price cut would cost the company $2 billion in annual profits. A healthy number, to be sure, but a fraction of the approximately $30 billion the company is expected to earn in fiscal year 2012. (Please note these are just back-of-the-envelope calculations, simply aimed at estimating the magnitude of a price cut.)

That said, a price cut may be unlikely, as analysts generally believe that margins on the iPad are lower than Apple's typical company-wide gross margin in the range of 40%; thus, Apple may not have room to drop prices as quickly as it did on the iPhone, for example. The iPad accounted for 21% of sales for Apple in the third quarter, and based on our margin assumptions we can estimate the device was responsible for roughly 15% of profits. A slowing in growth, or a sequential decline, in iPad sales will hurt the company's bottom line, but anything short of a substantial fall still does not appear to be a game-changer for the company's overall profitability.

Thus, if Amazon can successfully compete in the tablet market, and can put a dent into the iPad business through price cuts and/or unit sales declines, it seems unlikely to have more than a single-digit percentage effect on Apple's profitability as a whole. Even if Apple canceled the iPad tomorrow, its forward P/E would be around 15, and its PEG still below 1.

In short, the tablet competition seems yet another reason for Apple bears to discount the stock's remarkably low valuation of just 12-13 times forward earnings. Like the fears of depressed consumer spending, and the "overhang" of Steve Jobs' health, it seems another obstacle that Apple should be able to overcome easily. The company's valuation appears low enough, and its balance sheet strong enough, that even a successful rollout of the Kindle Fire should not change our thesis. Apple remains undervalued.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.