Power shift from Amazon(AMZN) to Apple(AAPL)

By: ispeculatornew
Date posted: 01.14.2010 (5:00 am) | Write a Comment  (6 Comments)

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Amazon has shown impressive growth almost from the start. It began as a no-name bookseller that was trying an unproven internet only model and became the dominant force as traditional competitors such as Barnes & Nobles took too long to get a significant online presence. And from then on, it’s been a ride to the stars for Amazon and its very succesful founder Jeff Bezos.

Just take a look at its sales growth in the past few years

TickerNamePricePE RatioPE Next YearReturn YTDSales GrowthAnalyst ratingBook ValueBetaRevenue/ShareSales 5Y Avg GrowthEPS 5Y Avg Growth
AOLAOL Inc50.7731.922.1212.7-0.473.9528.660.6324.06N/AN/A
PCLNpriceline.com Inc1178.0433.7723.241.9120.794.67125.991.26105.5632.5476.16

Amazon did jump into many other products and now has significant streams from electronics and other segments. Buying a company like Zappos a few months ago was also a significant step into both keeping a unique structure despite its growing business but also more diversification. But let’s face it, Amazon’s core remains its book business.

As books became more popular digitally, Amazon was smart enough to do 2 things:

-Launch the Kindle, the leading electronic reader
-Start selling digital books

All in the hopes of replicating to books what Apple has done to music. I have discussed many times how Apple has incredible power and as more and more music sales go through Apple, it has more pricing power towards consumers but also towards the music producers. And things are moving along very quickly. In fact, this Christmas was the first time ever that Amazon sold more digital books tan physical ones. This is HUGE and a big step in the new direction.

There is one major problem though. As it becomes more digital, its powerful distribution network, shipping infrastructure and competitive advantage all lose their importance.

It is all about 3 things now:

-The physical reader (Amazon’s Kindle)
-The book distribution
-The customer base

But now, we are only days away from the much anticipated launch of the Apple Tablet (whatever it name ends up being). Rumours are that it will be launched on January 26th. Now let’s go back to 3 important aspects of this digital book business:

Physical reader: Kindle is the best solution around but I don’t think anyone doubts that Apple’s product will be superior. Steve Jobs has not been launching products that wren not superior for a long time and this is one launch that will probably not be missed. The colours, look and possibilities will be far superior – advantage APPLE

Customer Base: Debatable who has the advantage as Amazon has many many customers that have been very satisfied over the years but Apple’s Itunes also has millions of buyers (70% of music sales are made on Itunes according to estimates), it is not yet clear which company has the advantage here. – TIE

Book distribution: Amazon here has a major advantage but it might not last very long for a few reasons:

-Publishers are frustrated with Amazon’s negotiating power and feel like more competition would be good for them instead of having one dominant player (such as the music industry’s situation)

-No publisher could afford not to get a deal with Apple, it would seem like suicide given how dominant the Steve Jobs company has been with applications and music. It’s probably only a matter of weeks before Apple catches up to Amazon – Slight Apple advantage but so small that I will put this as a TIE

So should Amazon be worried? You bet. I still think it’s trading very expensive right now (over 50 times earnings!!!) and you can probably expect me to go short Amazon in next’s week trade. Not saying it’s a done deal, but I’m strongly considering it.

Any thoughts on your end???

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6 Comments

  1. Comment by Jeff — January 14, 2010 @ 11:20 am

    I’m not sure I agree with your statement that selling books is Amazon’s core business. Yes, when they started this was true, but today Amazon’s “core business” is simply being an Internet retail behemoth, selling everything from e-books to mp3’s to saucepans and shoes. It’s a virtual magnet for consumers who shop for almost any product, with the largest base of user-reviews on just about any product you can think of. When people want to check out a product, the first place they go to is Amazon.com to check out the reviews (although that does not mean they will necessarily purchase from Amazon).
    While Amazon competes directly with Apple in the areas of books and music, Apple does not compete with Amazon in Amazon’s retail business, so even if Amazon loses market share to Apple in online book publishing, the negative impact to Amazon’s bottom line is questionable. In any case, the Kindle platform remains strong, and most likely a cheaper alternative to a tablet, so I’m not even sure of huge “the tablet killed the Kindle” scenario. There still will be customers for the Kindle.

  2. Comment by IS — January 17, 2010 @ 8:58 pm

    @Jeff – Good points yes, but that being said, I don’t really mean that the stock will plunge, but I would expect this to have an impact on its growth. And yes, the Kindle will remain, but it’s growth will slow down significantly.

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