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Adetokunbo Abiola
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I am a writer, journalist, and a value investor. I manage my tech and oil and gas portfolio and engage in photography in my spare time. I write to assist investors find profitable value in the market.
  • Can Amazon Prosper With Kindle Fire? 0 comments
    Jun 12, 2013 2:01 PM | about stocks: AAPL, GOOG, AMZN

    Amazon (NASDAQ:AMZN) recently announced that the Kindle Fire HD and the Kindle Fire HD 8.9 are now available to its customers in 170 countries. The products will provide the company's customers with an access to the numerous solutions exclusive to the Kindle store. In this article, I want to show how the dominance established by Apple (NASDAQ:AAPL) will not allow Amazon to halt the decline in its sales growth with the products. This factor will not help Amazon to improve its electronics and its general mechandise revenue.

    Why will Amazon's electronics and general merchandise division show a decline in its sales growth? The dominance of Apple in the tablets market is preventing the sales growth of the products of its competitors. The researchers at Canaccord Genuity have forecasted that Apple will sell 101.6 million iPads units in 2013. Samsung (OTC:SSNLF) is projected to sell about 8.4 million tablets, while Amazon is predicted to achieve the sales of about 10.7 million tablets. The Amazon projections will not be enough to prevent the decline of its electrical and its general merchandise division and improve the price multiples of the company.

    Financial

    Amazon's sales growth improvement is not a guarantee with the Kindle products. In the first quarter, Amazon's revenues in the electrical and the general merchandise division were $10.21 billion, a 28% sales increase from the $7.97 billion recorded for the same period in the year prior. However, the division's revenues for the first quarter 2012 were a larger 43% net sales improvement compared with the same period in 2011.

    In the fourth quarter, the division achieved revenues of $13.94 billion, a 28% sales increase over $10.91 billion for the same period in 2011. However, the revenues of the electronics and the general merchandise division for the fourth quarter of 2011 showed a bigger 48% improvement over the figure recorded for the same period in the year prior.

    Amazon and Kindle Fire

    Amazon has unveiled a number of strategies to increase the usability of the Kindle products since they were introduced into the market. The company has made its tablets to allow for better legibility. Amazon improved the industrial design of the products and cut their screen glare over the years. The company improved the pixel density from 169 pixels-per inch to a reasonable 216 PPI on the new 7-inch tablet and a 254 PPI on the 9-inch version.

    The newly available Kindle Fire products include a customized HD display with an in-plane switching and a laminated touch-screen sensor for a 25% less glare and a rich color. "Kindle Fire HD is the number one best-selling item in the world for Amazon since its launch, and we're thrilled to make it available to even more customers around the globe today," said Dave Limp, Vice President, and Amazon Kindle. "Not only does Kindle Fire feature advance hardware, it's also a service."

    Amazon wants the products to reverse the problem of a decreasing net income and halt the perpetual decline in its sales growth. Unfortunately, the Kindle Fire has not been able to accomplish this objective or halt the slide in Amazon's fortunes. This is dangerous to Amazon as it will not make it to gain a head start over its rivals.

    When we take another look at the revenues of the electronics and the general merchandise division in the recent results, we notice a decline in the percentage of its net sales growth year-on-year. It is clear that Kindle Fire has not corrected the problem.

    With a forward price to earnings ratio of 87.43, Amazon is not trading cheaply compared to 10.02 for Apple and 16.50 for Google. The newly available Kindle products will not prevent a decline in the net sales growth of the electronics and the general merchandise division. They will not improve the price to earnings ratio and establish a new benchmark for a great performance.

    Competition

    How is Amazon performing in relation to its rivals? With an EPS of -0.19, compared with 31.90 for Apple and 33.42 for Google (NASDAQ:GOOG); a price to earnings of an indeterminable figure, compared with 26.34 for Google and 10.51 for Apple, Amazon is not doing too well. In the next few months, Amazon's Kindle products will contend with a new version of Google's Nexus 7 and Apple's iPad mini. Asus will produce the new Nexus 7 device, and Qualcomm's Snapdragon will replace the Tegra chip from Nvidia. Apple has changed its course and will direct its energies toward the sale of the iPad mini. Amazon will not be able to overcome the competition and improve its price multiples.

    Conclusion

    There are too many risks involved with buying an Amazon stock. The company's earnings per share have declined from $2.53 in full-year 2010 to $-0.3 in full-year 2012. Amazon had an amazingly high price to earnings ratio of 3430.72 as at Dec. 31, 2012. Its margin is very thin. Based on the past performance of the Kindle products and the dominance of Apple, we can say the newly available products will not halt the decline of the Amazon electronics and general merchandise division. Looking at Amazon's price multiples in relation to Amazon and Google, we can say it is not a good buy for the long term.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Stocks: AAPL, GOOG, AMZN
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