Amazon May Be About To Build A True iPad Challenger

| About: Amazon.com, Inc. (AMZN)
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Summary

Amazon is seeing spreading shortages across its entire product lineup.

In some cases, like Echo and Fire TV, these simply show increasing demand and product brand power.

Fire buyers are also moving upmarket, buying more HD models and fewer $50 Fires.

At least some of the shortages likely presage a product refresh for Amazon's top-priced tablet.

Both these developments are bullish for Amazon, and potentially challenging for Apple and Google.

At the end of last week, I wrote an article about the latest area of competition for Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN), the streaming box market and the wider TV market it connects to. The article generated a lot of commentary about both companies. However, one thing that struck me over the weekend was that my focus may have been too narrow.

In the article I analyzed the current status of the streaming box market, noting that Fire TV was still out of stock more than a month after the holidays ended as demand remains robust. But in fact, Amazon is having shortages throughout its product lineup at present. E-Readers, tablets, streaming boxes, voice assistants and Prime-exclusive phones all have at least one model out of stock for two weeks or more. All but the phones and E-Readers have half or more of their total model variants out of stock.

Everything Is Selling Out

It first came to my attention when I did my customary check of Amazon's tablet devices this weekend and noticed that the Fire HD8 was now being advertised at a $120 price, $30 higher than it was at launch. At first I thought the price had actually been hiked, something almost unheard of for The Everything Store. But no. Actually, the company had just replaced the baseline variant with the 32GB expanded storage variant, which had always been $120. The reason why is simple: the more popular, 16 GB $90 version is out of stock all the way until April 7th. And the shortages are still spreading. Two of the four color variants of the HD8 32GB are also now out of stock, one until early April again and the other for up to six months!

Something similar is happening with the Fire HD10, its larger cousin. The 16GB version is still available, but its 32GB and 64GB are listed as out of stock completely. And unlike the Fire HD8, Amazon is not even guaranteeing these will ever be in stock again.

The shortages are also not limited just to the Fire line. They extend throughout Amazon's device family. The Echo Black is sold out again until February 25th, just like it was over Christmas when sales rose nine times over year ago levels. The White is still in stock, however. Meanwhile, the Kindle Paperwhite has just the opposite problem: the black option is still in stock but the white is sold out. Echo's $50 cousin, the Echo Dot, is sold out until the same date for the White color option, the black is sold out until March 2nd.

Possible Explanations

The shortages of so many products simultaneously outside the holiday season are somewhat unusual, certainly. Usually, when products go out of stock outside the holiday crunch, it means that the devices are about to be retired and replaced with updated models. But it's unlikely Amazon is going to literally replace its entire product lineup in the space of a few weeks.

Another explanation is that Amazon devices are just that good, just that in demand. But product shortages have now exceeded those in the heart of the holiday season, which was an unqualified success for Amazon. Fewer and fewer analysts doubt Amazon's right to claim a leading role in the tech device competition, but February sales outpacing December sales is a tall order for any company.

A third possibility is that these shortages are not all they are cracked up to be. Over the holidays I noted that a number of Amazon devices were listed at the time as being out of stock until April, even then. And yet many of them came back into stock over the first few weeks in January, including a few that had been given the 3-6 months designation. So perhaps the same thing will happen again and these products will be back far sooner than we think.

What It Means

My interpretation of this data is that we are actually seeing a confluence of a couple of different trends in the device market. While a device-wide shortage might seem to imply a device-wide explanation, I think a few different things are going on. The Fire TV and Echo shortages are simply natural shortages of in-demand products in rapidly growing sectors. The HD8 shortage is probably real, but being exaggerated. The other shortages, however, are something else.

The Echo and Fire TV are really Amazon's two most successful product lines, even above tablets. While Amazon's tablets sell well, they are still regarded as just "good enough," things you buy because the value per dollar is so much better even though they are not top of the line.

By contrast, Echo and Fire TV are widely seen as leaders in their field, things you buy because they are the very best money can buy. In fact, Fire TV is now projected to surpass Roku as the leading streaming box within the next 12 months. With Echo still being so new and Fire TV taking market share so fast, I believe Amazon simply is having trouble keeping them stocked. A good problem for Amazon to have, of course.

Tablet Shortage Is Different

The tablet shortage, however, I believe does portend a pending product refresh and potentially a very significant one. However, this is only part of the explanation. The refresh-linked shortages are happening alongside a product sales shift, one that is potentially very beneficial to Amazon.

Take the sales shift first. What leads me to believe one is occurring is the Fire HD8 shortages. With Fire HD8 having just been refreshed right before the holidays started, it seems unlikely that it would be upgraded again so soon, so something else is the cause. As I noted in my last article, supplier difficulties are always one possible explanation. But if Amazon knows it is about to suffer severe shortages of a Fire model, it seems odd it would continue to sell the $50 Fire models at a $10 discount. If you know you're about to run out of a hot item you don't need to cut prices. Presumably at least some HD buyers would buy the cheaper Fire if it was all that was available.

Admittedly, this is all part of a Valentine's Day sale that was announced before the shortages developed. So maybe Amazon just doesn't want to yank an already announced promotion. But I don't believe Amazon is having supply disruptions at all. I think Amazon may have been caught off guard by how well HD8 is selling. And I think at least some of those sales are actually coming at the expense of the cheaper model, not that Amazon would complain about that.

HD8 Increasingly Eclipsing $50 Fire

I noted before that the HD8, while still not as cheap as its $50 cousin, is actually a pretty incredible engineering feat for Amazon. An HD upgrade used to triple the price of a Fire device. Now, it is only $40 more to get more memory, more processor power, and most importantly to many users, a battery life twice as long at 12 hours or better.

Amazon did a pretty remarkable thing achieving all of that with a 40% price cut in one year. And it has a lot of people telling tablet shoppers that they are really better-advised to spring for the extra $40 for everything they are getting for it. So despite Fire $50's best-seller status, the sales mix may well be changing faster than Amazon anticipated.

I doubt it will really take 3-6 months to restock HD8, however, just as it didn't last time. Nevertheless, if Amazon is seeing a sales shift, it makes sense it would cut $50 Fire prices to move the current stock of the model and make it more appealing to those choosing between it and the HD8, to make the cost-benefit trade-off of the base model more appealing while it re-aligns the supply mix.

A New Fire Tablet

The last shortage, however, has a different cause, I think. Of all of these shortages, only one device is listed positively as out of stock indefinitely. That usually means it is never coming back, and that usually means a product refresh. It came as a surprise to more than a few people that Amazon did not update the HD10 prior to the holiday season, including me. If Amazon is now finally ready to do so, it would explain why the current HD10 is not only out of stock, but out of stock with no projected return date.

Updating any product in the Fire lineup is significant and sometimes under-appreciated by the market. Amazon's Fire devices, as I've said, play a crucial role in expanding its Prime ecosystem, which has become in many ways the very heart of the company.

But Fire HD10 has a particular role to play because it is the one tablet in the Amazon lineup that is still priced somewhat like a premium product. Three years ago, the cheapest new tablet in Amazon's lineup, the 7-inch HDX model, went for $229, the same price as the most-expensive HD10 does now. When sales disappointed, Amazon embarked on a major strategy shift to lower-priced, lower-spec units the following year, and as I've documented it's been a complete success.

Nevertheless, HD10 represents Amazon's last remaining foothold in the higher-priced market, though still nowhere near full-sized iPad prices. But it is the closest thing iPad has to a direct competitor in the Fire lineup, the one variant that almost comes off as "for iPad lovers who don't want to pay for an iPad." The only other contender, Amazon's old Fire HDX 8.9, was even more powerful and higher-resolution, but Amazon finally wound down that three-year-old product at the end of last year, leaving it without any truly high-powered tablets. This has left Amazon with a hole in its otherwise solid lineup.

It may be about to fill it.

Competitive And Investment Implications

The shift in sales mix I am postulating should boost Amazon's revenues and also customer satisfaction with the Fire line. Both are positives for Amazon, of course, but tablet sales revenues will remain a relatively small part of the total mix. Expanding Prime memberships will be more important, as I've already discussed.

The HD10 upgrade may be more significant. If Amazon can reproduce the battery life gains it made with the Fire HD8 and pair them with some higher-powered processors like what it sold in the old HDX lineups, closer to what iPad and high-powered Androids offer, it will mark a new kind of Fire tablet. Or a return of the old kind, more accurately. If it can do this without any price increase and perhaps even with a price cut below the psychologically important $200 threshold - i.e. $199 - it may create a strong new challenger in a shrinking market.

If Amazon continues to expand market share in a shrinking tablet market, that is obviously bearish for the incumbents, principally Apple and Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) Android platform. Thus far, Amazon has taken some market share from Apple but considerably more from Google. If that continues, Apple should hold up well - its low P/E will also help as I discussed last week. Google's stock also may not feel a hit until stronger evidence of decaying market position occurs. Altogether, increasing Fire success is more likely to be bullish for Amazon than bearish for its competitors' stock.

In sum, a strong showing by Amazon on a new large-screen, high-powered tablet may thus spur further upside in the stock. And it would unquestionably be a long-term bullish development, as Fire sales continue to spur Prime sales, which in turn continue to spur sales of pretty much everything at The Everything Store. Coupled with the signs of increasing spending by other Fire buyers, this is further evidence of Amazon's continuing advance in the tablet market.

Conclusion

I believe Amazon is about to announce a new tablet product, an update of its 10-inch model. I also believe Fire buyers are moving upmarket somewhat, increasingly springing for higher priced HD models over the base model. Investors should regard both of these as bullish developments in the long term, and potentially in the short term if the market is finally learning to value Fire sales more appropriately.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in AMZN over 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.