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Price competition for tablets is heating up. This should not come as a surprise as devices and content were always likely to follow a razor and razor blades pricing strategy.

Investors should focus on companies that make money from content rather than firms that focus only on the devices themselves.

Prices Slashed

Barnes & Noble (NYSE:BKS) has come out with its newest Nook HD+, which the company boasts is not only cheaper, but less bulky and lighter than Apple's (NASDAQ:AAPL) iPad. The new Nook is a compact 9-inches and is also around 25% lighter than the current iPad. Moreover, the latest iPad model retails for at least $499, while the Nook HD+ will be sold for as low as $269. The newest Nook went on sale at major retailers in late September 2013.

This newest Nook also makes its retail bid against the latest model of Kindle Fire, by Amazon (NASDAQ:AMZN). The Kindle retails for $299. All these new tablet models come in the wake of both holiday shopping, a period of high consumer interest and intense spending.

Both Barnes & Noble and Amazon have expanded their tablets beyond simply accessing digital books, and have improved the speed and screen resolution of their tablet models. The Nook Video system will even give consumers access to television shows and movies from various studios and channels on a paid service. Nook content also relies on cloud computing, allowing files to be accessed on other devices.

The announcement prompted a 6 percent rise in Barnes & Noble stock in trading in New York, leaving it at $12.99. Despite this rice, Barnes & Noble shares have dropped about 10 percent off their 2011 values.

The new Nook is part of a new strategy by Barnes & Noble to retain and increase its share of the e-book market in the U.S., of which it now holds about a fourth. However, the Nook also faces competition from tablet manufacturers such as Google (NASDAQ:GOOG) and Microsoft (NASDAQ:MSFT), along with Amazon and Apple, all of which will be releasing their own tablets in time for the holiday season.

Microsoft will make its long-awaited debut in the tablet market with its Surface RT, which is priced at $499, with a view to compete against tablet market leader Apple.

The Surface will be available through Microsoft retail stores and online for people to order. It comes with the latest version of the Microsoft operating system. Customers nowadays prefer tablets over traditional laptops and desktop computers. Sensing this opportunity, Microsoft has timed its entry into the tablet market impeccably.

The company said that its first device will be a 32GB model powered by an ARM Holdings (ARM) chip. The 64GB version will cost $699 and is set to hit the market on October 26. Its online sales have already started.

Laypeople might view the $499 price point as the beginning of a price war. Analysts concur with this view. IDC analyst Bob O'Donnell said, "Everything is pulling tablet prices down to below $500, so anything over $500 -- that is a tablet that is going to look expensive." Microsoft's entry into the market will also step up price competition for mobile devices from Google and Amazon.

Apple's latest iPad has the same $499 pricing for a 16GB version as that of Microsoft's 32GB Surface. Apple recently released the iPad mini, which will start at $329. At this price, Apple is focusing on keeping its profit margins high through brand loyalty. Shares of Apple fell 3.3%, or $20.67 on this announcement.

At this point, it seems like every company is launching some kind of tablet. Even Hewlett-Packard (NYSE:HPQ) is moving into the business-focused tablet market is one small, tactical move to dominate this niche market. CEO Meg Whitman is avoiding direct competition with Apple's iPad in the consumer space. This is probably wise.

Predictable Price Cuts

The drop in tablet pricing should not come as a surprise. Each device maker is trying to ensnare consumers in its platform. Once committed to a platform, that consumer will purchase media over and over again. For an Apple tablet the content could be different apps downloaded from Apple. For Amazon or Barnes & Noble the content will include more ebooks. These device makers are willing to cut profits or even take a loss on their devices to populate their platforms with consumers.

This is not a new tech strategy: the same strategy dominates printer and ink pricing. Companies sell printers at lower margins in order to gain customers who buy compatible ink cartridges over and over again.

From this perspective Microsoft's venture into mobile devices makes less sense because it does not have the catalogs of content or apps, which are already written and developed on other platforms. Microsoft may be late to the tablet party.

Strategy and Valuations

The strategic positioning of a tablet device/e-reader and content for it should be considered differently for different firms. Investors should view tablets as a nice side-business for a tech company and an essential bridge to the future for booksellers.

First, we should check to see if any of the firms engaged in this endeavor have stocks that trade at attractive valuations:

Ticker

Company

P/E

P/S

P/B

AAPL

Apple

14.9

3.99

5.32

AMZN

Amazon.com

285.1

1.95

14.08

BKS

Barnes & Noble

NA

0.12

0.93

HPQ

Hewlett-Packard

NA

0.24

0.92

MSFT

Microsoft

15.14

3.26

3.43

Apple's dominance over tablet devices complements its reasonable valuations. It is a clear pick over Microsoft, which is trading at nearly the same price multiples but is only a tablet upstart. Hewlett-Packard is challenged and has been unable to generate positive earnings over the past 12 months nor is its new tablet device particularly meaningful. Overall, Apple is a clear winner among these three stocks.

In contrast, Barnes & Noble is probably a better investment candidate than Amazon based primarily on valuation. Its price-to-sales multiple is one-sixteenth that of Amazon and its price-to-book ratio is cheap even though it excludes many intangible assets. Barnes & Noble stock is cheap enough that the challenges facing the Nook in a Kindle-dominated world don't seem so bad. Barnes & Noble should be viewed as a speculative bet and would only be prudent for small investment amounts.

I am recommending Apple and Barnes & Noble as definite buying opportunities, but I still think investors should consider Microsoft and Amazon. Investors should avoid HP at this time.

Source: 2 Tablet Kings To Buy Now, 2 To Consider