Why Google’s Tablet is a Nuclear Strike on Amazon’s Pricey Stock: Whither the Kindle?
If all those tech geeks were right, sales of Amazon.com’s (AMZN) Kindle Fire should come to a screeching halt about now as tablet buyers discover Google’s (GOOG) Nexus 7 for the same $199 price. The folks that got their hands on Google’s new baby at yesterday’s launch couldn’t find any reason someone would buy a Kindle Fire instead of a Nexus 7. This may be Amazon’s biggest “oh crap” moment to date.
Amazon’s Kindle Fire has been a huge success for the company, the best contender on offer against Apple’s (AAPL) glorious iPad. While the iPad was accepted as technically superior, the Kindle Fire’s price at half the iPad’s made it very popular. Amazon doesn’t reveal the device’s actual impact on its bottom line, but it is believed to have sold 1.8 million of them in the first quarter of 2012 alone. It was surely a key component for this huge rise in sales since after its Nov. 15 launch.
Amazon will reportedly launch a redesign of Kindle Fire late next month, and that may be a mixed blessing for the company’s investors. Amazon is widely believed to lose money on every sale of a Kindle Fire, and it’s hard to see how a new improved model at the same price could do anything but lose even more. Unless Amazon can do something on the tech front Google can’t, it’s also hard to imagine Amazon asking buyers for more money for the new model. At $199 each, Google is expected to lose money on its new device too, but Google has a helluva lot more of it to lose. Google is not seeing its profit margins shrink at a rampant pace.
Fewer sales of a money losing product would, of course, help Amazon’s profit margins. But investors still buy Amazon shares for its super sales growth. It hasn’t had earnings growth since late 2010, and profits are still tiny for a $100.7 billion market cap company.
It is that sales growth, which is about 158% in the past three years alone, that investors use to justify Amazon’s incredible share price. Amazon shares trade at about 167 times earnings now, but its price to book value">price to sales ratio is a less alarming 1.8. (For the record, Google, which had revenue growth of 24% in the past 12 months compared to Amazon’s 34%, trades at a PE ratio of about 17 and a PS of not quite five.)
Sustaining that kind of valuation – aka, maintaining a share price – typically requires churning out some really boffo sales gains, or at least some noticeable profit gains. For Amazon, Google’s little dog and pony show just made getting either of those things an awful lot harder.
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