Sell Amazon - Even The New Kindle Doesn't Warrant Sky-High Valuations

Sep.13.12 | About:, Inc. (AMZN)

Amazon's (NASDAQ:AMZN) stock recently got a boost due to the unveiling of its new Kindle models. It touched $260 on Sept. 10 and has declined by almost 2% since then. The new models range from an ad-supported $69 e-book to the $499 Kindle Fire HD. Amazon backs them up with a content ranging from books to apps and movies. The tablet market is expected to reach $66.4 billion this year, with the big competitors for Amazon being Microsoft (NASDAQ:MSFT), Google (NASDAQ:GOOG), and Apple (NASDAQ:AAPL). In this article, we reiterate our earlier recommendation for investors to realize their gains at the current price.

The cheapest seven-inch tablet is sold for $159, while the 8.9-inch 4G LTE iteration one is sold for $499 and is aimed at a higher-end tablet market. Therefore, these tablets appeal to many people because of the different price points. Apple, being the industry leader for tablets, has more chances of losing its market share and thus takes the challenge posed by Amazon seriously in the low-end tablet market. There is an expectation of a smaller model of the iPad to be sold at $299 in order to compete with the Kindle tablets. Amazon currently has 22% of the tablet market, which can be expected to increase after the latest models' release. Google's Nexus 7 tablet, priced at $199, and Microsoft's Surface tablet are among other competitors. The Kindle Fires have received mixed reviews when compared to the competitors' products mentioned above, although they are definitely an improvement over the previous Kindles.

A week after the new line of Kindle tablets was revealed, in a statement to the press Amazon said that it would give customers the option to opt out of advertisements for a premium of $15. Amazon's strategy remains the same; selling hardware at razor-thin margins to drive up content and services sales, an area where the company has the upper hand among competitors. Jeff Bezos said that "people don't want gadgets anymore. They want services." He also said that at these prices, the company would break even or lose money, which it plans to make up for by content (apps and books) sales.

Amazon is competing effectively against bricks-and-mortar retailers like Best Buy (NYSE:BBY) based on prices and its renowned customer service. Streaming service Netflix (NASDAQ:NFLX) has also taken a hit due to Amazon's new content deals. Amazon is also spending on fulfillment centers so that it can achieve same-day delivery to gain an edge over retailers.


Amazon trades at forward P/E of 107 times as compared with Apple's 13 times and Microsoft's 9 times. Goldman Sachs recently removed Amazon from its high-quality basket of stocks, which are expected to provide stable sales, earnings growth, and strong return on equity.

Owing to its large multiples and narrow margins, we had advised investors in our previous article to realize profits at the current ideal prices. We reiterate our stance because Amazon's future might look appealing with the latest developments, but the stock price is too high for value investors at present compared to its earnings. A small drop in gross margins or revenues can lead to a large drop in the stock price. Earnings are not expected to rise in the near future due to heavy investment to expand its network of fulfillment centers, free two-day shipping costs under Amazon Prime, acquiring content for streaming services, and selling hardware at very thin margins.

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

Business relationship disclosure: The article has been written by Qineqt's Retail Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.