Of course Amazon (AMZN) results are terrible!! Blame Apple (AAPL)

By: ispeculatornew
Date posted: 07.23.2010 (4:00 am) | Write a Comment  (18 Comments)

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I’ve been a fan of Amazon to a certain extent in recent months but have been very critical of Amazon’s continued focus on the Kindle will end up costing Amazon. The electronic reader has been losing market share very quickly to Apple’s Ipad and with Amazon announcing last week that it was now selling more electronic books than physical ones, an important portion of Amazon’s business is under threat.

Not that bad

Just to put things under perspective, Amazon did report earnings per share of $0.45 which is almost 50% better than the same quarter last year. However, it is also well below the analyst expectations of $0.54 not because of a lack of revenues (they were more or less in line) but rather because of profit margins that were much lower than anticipated. But it is all about expectations and there is no way Amazon lived up to those.

Margins will improve but not enough

One of the big reasons why margins failed to meet expectations was the major price cut in the Kindle as Amazon continues to try to stop the bleeding. It followed Barnes & Nobles’ Nook and tried to use a lowe price point to convince consumers to use the Kindle instead of Apple’s Ipad. Unfortunately for them, Apple’s consumers to not seem to be very sensitive to price changes which means that even taking prices down will not help much…

Over time, as Amazon continues to move towards digital goods, its margins should improve simply because the costs are smaller, there is no shipping but that will not be enough. Competing with a company whose consumers do not mind paying more means that there really is little that Amazon can do right now except refocus on its core.

Consequences of the Ipad’s dominance?

The problem of course of losing market share, especially to Apple is that it will greatly diminish Amazon’s powerful spot as the world’s greatest book store. Yes, living in an Apple world will be difficult for Amazon, just ask Research in Motion how things are going. Just yesterday, Amazon was able to secure a deal to be the exclusive seller of some of the most known books from the 20th century. I strongly doubt that such deals will be possible if Amazon keeps losing market share as these publishers will end up wanting to get access to as many potential customers as possible. The other main problem is that all of Apple’s consumers take the “choice” of getting “no choice” when they purchase Apple’s products. What I mean is that Ipad owners will be buying their books on Apple’s Itunes when they decide to purchase books & magazines. It is their preferred option which will remove Amazon as a potential consumer for millions and millions of consumers. There are other ways to buy books such as Amazon’s application on the Iphone/Ipod/Ipad but the vast majority of users continues to buy directly from Itunes.

Consumer struggling

Another very difficult aspect of Amazon’s business is that it relies heavily on the US consumer which continues to struggle as the economy shows limited recovery.

Stock in free fall?

After seeing Netflix (NFLX) crash down and lose about 13% of its value yesterday, will Amazon be next in line tomorrow? It certainly looks that way as the stock traded between 15% and 20% down after hours, incredible for the internet darling….Could Amazon fall below 100$? Very unlikely and I certainly don’t expect that to happen but even a loss of 10% would be huge for Amazon as things continue to be tough for CEO Jeff Bezos.

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18 Comments

  1. Comment by Mario Cardoso — July 23, 2010 @ 4:22 am

    An important fact has been left out, Amazon’s books are also sold in the iPhone and the iPad through the Kindle app, and it usually offers a better price than iBook (Apple’s app). This may not hurt Amazon so much in the book sales figures, since compared to Apple and the others they are able to reach a broader consumer base.

  2. Comment by IS — July 23, 2010 @ 4:24 am

    @Mario – Good point and glad you brought it up but I would be confident that:

    1-Amazon doesn’t feel very comfortable getting decent market share with these users
    2-A very very high proportion of Iphone/Ipad/Ipod users buy 100% of their music & books from Itunes

    would you agree? Thanks for pointing that out though, should have mentionned it

  3. Comment by h00tz — July 23, 2010 @ 4:23 am

    “It is their preferred but also only option”

    No, it’s not.
    iPad and iPhone users can download the free Amazon Kindle app and use that to purchase and read books on their Apple devices.

  4. Comment by IS — July 23, 2010 @ 4:26 am

    @h00tz – As I told Mario, yes, should have pointed that out although it is what most users do use. I did correct that though, thanks for pointing that out.

  5. Comment by david — July 23, 2010 @ 4:34 am

    Forgetting the company for a second and focusing on the stock, I believe the point is Amazon is priced for perfection (and then some). Missing earning estimates by 20% and then guiding margins/profits lower for the next quarter sets up AMZN for a 20% plus down day (although this is somewhat dependent on what the analyst community does this morning). If there are more than 2 or 3 downgrades then a close below 100 today becomes more likely. If however the Analyst’s call it a one off or try and play the miss down, then a close nearer to 110 becomes possible. I find it hard to think that Analysts could ignore such a dreadful miss but then with them anything is possible.

  6. Comment by IS — July 23, 2010 @ 4:43 am

    @david – Very well said yes. I would still think that the stock will hold on to 100$ but we’ll have to see. And yes, no doubt, there will be a few downgrades..! Again, they should have seen a lot of this coming in my opinion.

  7. Comment by david — July 23, 2010 @ 5:02 am

    yeah i’ve been short a while (and having a bad time), but the release on monday of e-book sales and Kindles sales tripling seemed like another warning signal.

  8. Comment by IS — July 23, 2010 @ 5:11 am

    @david – short Amazon against something else or just short?:)

  9. Comment by david — July 23, 2010 @ 5:25 am

    Short AMZN, Long RIMM, short DJIA.

  10. Comment by IS — July 23, 2010 @ 5:55 am

    @david – excellent, well today should help that trade!

  11. Comment by rrtzmd — July 23, 2010 @ 8:32 am

    …buying time again?…I think so…I’m nore of a technician and perceive the sell-off as likely overdone as it typically is when the initial “shock” of less than expected earnings hits…babble all you want about fundamentals..when the big institutions look to it to buy any recovery signs of retail strength, they’ll buy AMZN…look up charts for pretty much any retailer, they all look about the same regardless…e.g. compare BBBY to AMZN…BBBY earns almost as much per share and trades at half the price of AMZN…yet the graphs of their stock prices look nearly identical…best bet is to follow the leaders…

  12. Comment by Nook Covers — July 23, 2010 @ 12:00 pm

    while the portable reader marketplace is getting red hot with Kindle, iPad and the Nook, each will occupy their own niche and attempts for their market share. In whatever it takes in terms of price wars and better features, consumers are the one who will be happy.

  13. Comment by IS — July 24, 2010 @ 9:02 am

    @rrtzmd – You were maybe right yes. No doubt that those who bought after hours on Thursday made a very nice profit by simply selling the next day!!

    @Nook Covers – No doubt, consumers will be winners as will be some investors;)

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