Last week, I suggested that it is perhaps time for Apple (AAPL) to start taking Amazon (AMZN) a little more seriously. Aside from its notable foes such as Google (GOOG) and Microsoft (MSFT) Amazon (with its Kindle Fire) is slowly building a content distribution platform franchise to rival that of both iTunes and the iCloud – and there is early evidence to suggest that it will be a force to be reckoned with.
In a recent article by Seeking Alpha contributor Erick Schonfeld we learned just what type of force this will likely be. Erick noted the following:
- The Kindle Fire looks like a bona fide hit right out of the gate. New estimates from IHS iSuppli have Amazon.com shipping 3.9 million Kindle Fires this quarter, which would make it the No. 2 tablet after the iPad 2 (with an estimated 18.6 million shipments). The Kindle Fire will become the No. 1 Android tablet by a wide margin (the Samsung (SSNLF.PK) Galaxy Tab is the next biggest, with an estimated 1.4 million shipments).
- To put this 3.9 million number in context, just remember that the very first quarter Apple sold the iPad back in the September quarter of 2010, it sold 3.3 million. So the Kindle Fire sold more in its first quarter than the iPad did in its first quarter on the market. Of course, Apple sold 7.3 million iPads the second quarter it was on the market, which was the 2010 holiday quarter.
Remarkably not many thought Amazon had a puncher’s chance with its tablet strategy, much less immediately becoming the No. 2 seller behind Apple’s iPad. This comes on the heels of Research In Motion (RIMM) reportedly having taken a $500 million charge due to its own tablet failures – as its never ending battle with ineptitude continues.
Never Bet Against Good Management
When retail giant Amazon first announced that it was getting into the competitive tablet market with its Kindle Fire, many wondered if the strategy would work. This doubt had little to do with any perceived flaws in execution by Amazon, but more to do with Apple’s dominance within the space and the destruction it had left behind by anyone with enough nerve to get in the way of its iPad.
These included prominent companies such as the aforementioned RIM who could only toy with its Playbook and Hewlett-Packard (HPQ) who introduced the TouchPad and immediately realized that it was out-of-touch. One might even throw Cisco's (CSCO) Cius tablet into the mix. All in all it has been a long list of disappointments. It seems only those on Google’s popular Android platform have had any degree of success. It has long been understood that it has been Apple versus the field – until now.
“We think of Kindle Fire as an end-to-end service.” This is how Amazon CEO Jeff Bezos described it during the product launch two months ago. During which, he also said the following:
“In the modern era of consumer electronics devices, if you are just building a device you are unlikely to succeed,” he says “Today it is about the software, the software on the device and the software in the cloud. It is a seamless service - this is Kindle greeting you by name when you pull it out of the box. Some of the companies building tablets didn’t build services, they just built tablets.”
What is holding back the mainstream adoption of streaming video? “I think it is happening quickly,” he says. “The thing that needs to continue to happen is to get people to connect their TVs to the Internet. If they have a recent TV, it may have IP capability, but they haven’t hooked it up. They don’t even know that.”
There is no doubt that Amazon will continue to dominate the ecommerce space for many years to come. By the early success of the Kindle Fire, Amazon is showing not only does it have the ability to execute but is also keen on its evolution into untapped growth areas. And as always, that is what Wall Street craves as evident by its recent hiccup in its third quarter results where the stock hit a wall.
Though the company continues to demonstrate that it has no problem producing top-line growth, as the Kindle Fire strategy has proven, that growth is going to cost a significant amount of money. For the quarter, Amazon reported 44% growth in revenue and a 37% increase in organic revenue. It reported growth in media of 24%, during which it saw 21% increase in media sales from North America. Its fulfillment expenses spiked up a bit to 65%. It is hard to consider this a surprise, but certainly the 54% jump in marketing was.
The not so stellar results contributed to a 25% decline in the stock upon the release of Q3 figures - something that I can only describe as an overreaction. Investors who are looking to capitalize on this recent drop should really consider taking a long look at current levels.
With early indicators of “Fire sales” and Prime subscriptions, one has to consider that a $250 target not only is now becoming more of a reality, but possibly extremely conservative. As in Bezos' references above to content delivery mechanisms and IP televisions, investors have to also welcome the idea that the company is not content to being second fiddle - not to Wal-Mart (WMT) and certainly not to Apple.
Disclosure: I am long AAPL, CSCO, MSFT.