Time To Short Amazon And Go Long Apple

Includes: AAPL, AMZN, BKS, HPQ
by: Paul Zimbardo

In the aftermath of Amazon’s (NASDAQ:AMZN) introduction of the color Kindle, Amazon Fire, the media has been abuzz anointing the Fire as an Apple (NASDAQ:AAPL) “iPad Killer”. Below is a collection of three of the headlines that caught my eye:

You would think that pundits would have learned that lesson after calling every new mp3 player an ‘iPod killer’ and every new smartphone an ‘iPhone killer’. Let’s start out by saying that there will be no iPad killer. The only way in which the iPad will be “killed” is if Apple decides to kill it just as they have effectively done with the iPod. For example, in iOS 5, the app to play music has been changed from “iPod” to simply “Music”.

After I address the primary reasons why Amazon’s latest eReader is not a threat, I will explain how Amazon may have inadvertently helped Apple expand its empire to its own detriment.

To put it simply, Amazon and Apple have different strategies to target unique target markets. Amazon sells eReaders at a loss to simply serve as a gateway into Amazon’s store. On the other end of the spectrum, Apple generates significant profits from each iPad sold and uses it to further sales of other iOS devices. The Kindle is missing key features such as hundreds of thousands of apps, microphone, camera, 3G, native email client, etc. but costs $300 less to compensate. Google’s (NASDAQ:GOOG) Android fluid operating system will be a big selling point but the app store is still holding it back in the tablet space. As I said earlier this week, consumers are not deciding between a Kindle and an iPad but are rather choosing between a Kindle and Barnes & Nobles’ (NYSE:BKS) Nook Color.

The Kindle Fire had nearly 100,000 preorders within the first day of its availability, signaling that it will have real momentum behind it upon its launch. The companies that should truly be terrified are those who produce low-end tablets and dedicated eBook readers. This may not seem like a huge number in the aftermath of Apple hitting one million iPhone preorders but 100,000 is a significant number for a tablet.

I stand firm in my belief that Apple will benefit tremendously from the proliferation of budget tablets such as the defunct $99 HP (NYSE:HPQ) Touchpad and the Kindle Fire. While tablets are tremendously popular, they are still the type of product that depends on the user experiencing them first hand. Once consumers try the technologically inferior Fire (Amazon fans – please do not get up-in-arms, this is basically a fact as a $200 tablet cannot have the specs of $500 one) they will aspire to own the flashy iPad.

Amazon will do a great job at thinning the ranks of the tablet competitors leaving primarily Apple to command the lion’s share while others fight for the scraps. The Kindle Fire will appeal to those who are already loyal Kindle users and Amazon customers, but I do not have the impression that this will appeal to the masses – only time will tell. With Amazon up approximately twenty points since the announcement and Apple declining so drastically after its earnings announcement I find the pair trade of Long AAPL/Short AMZN quite attractive and worth a look. The gap between the relative performances has narrowed but Amazon has outperformed Apple since October 3rd and has still led Apple by four percent in the last month.

Disclosure: I am long AAPL, GOOG.