Amazon’s Miss Flatters Apple

10/26/2011 11:02 am EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

The maker of the iPad outearned the developer of Kindle Fire by more than 100 times in the recent quarter, giving it a big leg up in the looming competition, writes senior editor Igor Greenwald.

There are two ways to look at the disappointing results (AMZN) posted last night, and the ensuing plunge in its stock.

The good news is that no one owns Amazon for its shrinking bottom line, given that the stock sells for 100 times trailing earnings. Amazon investors are there for one thing: breakneck growth sufficient to fuel capital gains, and Amazon continued to show sharply higher revenue, posting a 44% increase.

Income suffered because Amazon continued to invest in its aggressive expansion at home and abroad, and in its loss-making new Kindle Fire tablets.

But this is no Netflix (NFLX) tale about a company without much pricing power getting squeezed by powerful suppliers. Rather, Amazon is foregoing present profits to protect its dominant role in the publishing market, where it retains all its leverage.

For a company with Amazon’s long-term focus, an earnings miss is far less damaging than a revenue shortfall. And indeed, the stock has already recovered some from the depths hit in after-hours.

The less charitable spin is that the losses suffered on the Kindle Fire are only the first injury Amazon will suffer as Apple (AAPL) encroaches on its distribution empire. The Kindle Fire will be a best-seller to be sure, but the iPad has had quite a head start, and is due for a 2012 update that could douse the Fire’s appeal quickly.

Apple’s line of smart TVs, also due to launch next year, could seal its dominance of the living room. Insofar as Amazon looks at the Kindle as a way to distribute its content, it will need to reckon with the dominant consumer hardware creator with its own designs on that business.

This is not a fair competition, and not just because Apple’s technical breadth and depth makes Amazon look like, well, a retailer. There’s also the matter of pricing power.

Amazon earned $63 million in the latest quarter, versus $6.62 billion for Apple. That’s right: Apple earned more than 100 times more than Amazon. Amazon does have $6.3 billion in cash and marketable securities; Apple makes do with $81 billion.

When it comes to most effectively levering financial might and technological edge into hardware sales, who do you think will have the upper hand?

Curiously, Amazon is valued like a hothouse tech IPO, despite what any future downturn in demand will do to the cost of all those new brick-and-mortar warehouses and server farms. Meanwhile, Apple, which is profiting like Amazon can only dream of and enjoys margins that will cushion it in anything short of Armageddon, is valued like a clunky industrial concern.

I’m as mystified by this disparity as I was three months ago. Presumably, the market feels that Amazon’s distribution network is a bigger competitive advantage than Apple’s creative edge. But in light of last night, I wouldn’t take that to the bank just yet.

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