Back in August, we made a list of companies that were collateral damage of Apple’s Creative Destruction. That eventually morphed into a Washington Post column, And then there were none: Apple’s destruction of rivals.

The latest victim of the Apple machine? Amazon.com.

The numbers were pretty awful. Q3’s profit disappointment missed by 42%, and that number was, according to Bloomberg, “the biggest negative surprise of any technology business in the Standard & Poor’s 500 Index.” The loss sliced nearly 20% off of its market cap, whacking $20 billion from over a $110 billion cap to under $92 billion.

And next quarter isn’t going to be any better. Projected Q4 losses on the Kindle Fire alone are $200 million dollars; (JPMorgan thinks Amazon can sell 5 million Kindle Fires in Q4) Amazon may be subsidizing the Fire anywhere from $10 to $100 — in the Holiday sales season, the losses are going to amount to a lot of red ink.

I have been an Amazon fan since my geek college roommate gave me a gift certificate for the holidays around 1997. I am a good consumer, a loyal Amazon customer who spend an awful lot of money there each year. I find its free shipping, huge selection and customer service (got to have the magic phone number!) mostly delightful. But Valuation and Accounting have always been Amazon’s Achilles heel. Now it seems as if both of these factors are going to be a drag on what looks like a pricey stock.

Amazon says its building for the future, and to some degree, that has been true. The problem is its been true for 15 years, and the future has pretty much arrived. They must be referring to the next future, the one that is another 15 years off in, um, the future.

Question is how much patience investors have these days.

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Daily Amazon

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Monthly Amazon

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Sources:
Amazon’s Apple War Costs Investors $20B
Danielle Kucera
Bloomberg October 26, 2011  
http://www.bloomberg.com/news/2011-10-26/amazon-s-apple-war-costs-investors-20b.html

Category: Corporate Management, Earnings, Technology, Valuation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

29 Responses to “Is Amazon the Latest Victim of Apple?”

  1. GeorgeBurnsWasRight says:

    Let’s compare: Amazon is selling Kindle Fire at a loss to get the revenue from selling content to its users.

    Apple sold iPods to get revenue from music and iPhones, in part, to get revenue from apps. But didn’t Apple sell both iPods and iPhones at a profit? Seems like Apple has a better business model, unless Amazon gets a lot more revenue from Fire and/or has greater margin on that content. It doesn’t look like either is true at this time.

  2. Concerned Neighbour says:

    “Amazon says its building for the future, and to some degree, that has been true. The problem is its been true for 15 years, and the future has pretty much arrived.”

    Thank you Barry. This is what people don’t seem to understand. 30% top line growth is fantastic, but if you aren’t making any money it probably isn’t a good investment.

    AMZN was trading at 100 P/E before this announcement, and that’s with razor thin profit margins which may actually go negative in the near future. And of course, no dividend. As a value investor, I have to say AMZN is one the of the most expensive stocks I’ve ever seen. Yet whenever it plummets on quarterly results, “investors” seem to step in quickly to pump it up some more. It reminds of the dot com bubble days.

  3. wunsacon says:

    Apple didn’t cost investors $20B. Irrationally exuberant investors turning an 80-PE stock into a 100-PE stock cost investors $20B.

  4. wunsacon says:

    >> Amazon says its building for the future, and … years off in, um, the future.

    Reminds me of Karl Denninger describing how as an ISP operator in the late 90′s he had to “bet the business” every few quarters on new technology in an ever-escalating bandwidth/price war with competitors.

    Compare that with this situation. Amazon and Apple both want to be first in front of the user’s face, because they then get to steer customers to *their* clouds of digital content. The battle for the user’s eyeball is migrating off the desktop onto mobile devices, where Apple has substantial control. If Amazon doesn’t “bet the business” here, maybe Apple sells the music, videos, books — and, later, more expanded inventory — Amazon would’ve sold.

    IMO, the antitrust department should prevent this much vertical integration. Separate hardware makers from online stores.

  5. KidDynamite says:

    but business is booming:

    “During a conference call with analysts, Amazon Chief Financial Officer Tom Szkutak said the company ended last year with 52 shipping centers, and is on track to add 17 more this year.

    Amazon had previously forecast the opening of 15 new centers this year, but said Tuesday that expectations for future growth spurred it to add more facilities to its plans.

    “We’re seeing really unprecedented growth,” Szkutak said during the call. “So with this strong growth we’re investing in a lot of capacity.”"

    margins shrinking… make up for it in VOLUME? ;-)

    disclosure: no AMZN position – love the company as a consumer – and I think they’ll be around for a long long time. I think i’ll buy my electricity from AMZN at some point…

  6. Mike in Nola says:

    Despite the Fanbois’ tendency to see the world through Apple-tinted glasses, Amazon has alway had thin margins, as someone else pointed out. That was one of its problems in the tech bubble: plenty of growth with no profits. And, competes in a number of areas besides the rather specialized consumer electronics Apple offers.

    It competes against Netflix, Vuudu, Apple (small potatoes in video) and cable on demand in streaming video. It competes against B&N and formerly Borders in hardcover and E-books. It competes against numerous other internet and brick and mortar businesses in computers and electronics, e.g. Newegg, Best Buy, and even Walmart, kitchen gadgets (just ordered a new Krups coffee grinder as our 25 yr old one is starting to crap out and no one sells them locally) and it even sells coffee. Retail is a tough business.

  7. Livermore Shimervore says:

    buying oppourtunity. …Comparing EVERY company to Apple is a bit unrealistic. As China’s top man once famously said “Unfair trade? Apple Ipod retail $300. Cost for us to produce $20. Steve Jobs take home difference. No jobs in America? Call Steve not us”. (<—slight embellishment but you get the point.
    This sort of low cost to produce vs. the ability to slather huge mark ups onto the massive audience of fanboys from toddlers to seniors is perhaps a once in a life time event. Unless you are the type of Enron investor who sinks all his money into the company he/she knows best then you would be wise to see that consumers will have to turn to other brands as well. One company can't deliver it all. As Apple and Android duke it out for global market share(a battle that Android will eventually win – the Titanic vs a speed boat) Amazon will be waiting in the wings to sell to both because I-tunes sucks, a god awful monster, and e-commerce the Amazon way is here to stay.
    Steve is gone and I doubt that there is anyone at Apple who has the vision to undo all of Bezos' decade of work. The Kindle Fire will be a big seller, mostly because Apple refused to adapt a smaller device Ipad sooner, and like Google, the Kindle ability to spread user information and content to multiple devices, without annoying Apple like compatibility issues, will perpetuate repeat sales for content. The simple reality is that margins in a ditigal world will be getting tighter. Apple sustaining these huge profitability advantages will not last forever. The list of features that Apple devices have that Android phones and tablets do not have is a list that is shrinking by the hour. It's going to be hard to keep asking their customers to fork over so much when other devices get the job done and deliver the same Amazon content just as well. The fact that Samsung is already putting together better hardware on their tablets (betters displays, lighter, thinner and with 4G 10-15x's the speed of 3G) means that Apple is going to have to contend with some higher costs eventually: 4G capable long-lasting batteries and large retina displays arent' going to come as cheap as you see with the Ipad2 and their now nearly three year old hardware.

  8. Arequipa01 says:

    So, I look at the monthly chart screen grab that Mr. Ritholtz placed in the post and I ask myself:

    “Self, why is it that AMZN, a retailer, tripled in 2003, traded within a ‘narrow’ range (with downward bias) from 2004 to mid 2007, and then spiked (?), pooped out and then went parabolic Dec 2008/Jan 2009 (inexplicable) a moonshot that has lasted for 34 months- a period which is marked by a contraction in consumption? How are the numbers possible? 2004-2007 is Era of MEW, of HELOCs out the waz(ew), unsustainable, credit driven binge buying and AMZN is rolling between 27 and 54? Huh?

    How did this recent price get constructed? Who is a buyer of AMZN above 200? What does one say as the finger (an institutionally fat one?) hits the buy button.

    100 P/E? Huh? Does anyone do any risk analysis? Or is the best thing about OPM that well, it’s OPM, and burns so brightly, and smells so sweet?

  9. JimRino says:

    At $200 it competes in price to the $500 iPad, but it also competes with the smaller iPod at the same price.
    - The question is how many books or paid games and apps will the user purchase?
    - At what point with Amazon make a profit: 2 books, 4, 6, 8…?

    Apple is not covering all demographic with their $500 price point.
    I’d say the market is at least double in size at the $200 price point, it may actually be 10x larger.

    At $200 you can justify a Kindle as an electronic book reader, to store 100 books.
    It may be Apple that has to respond to the Kindle.

  10. b_thunder says:

    AMZN (the company) will be here 5, 10 and most likely 15 years from now. The stock may be going nowhere fast but, like WMT, AMZN will grow sales and earning.

    Will AAPL be around in 5, 10, 15 years? Yes it will. But will it be Apple of 2010 or Apple on 1996? The *only* reason AAPL is able to sell products like their 1st iphone (no 3G, crappy camera, no memory slot) for that outrageous price is because of Steve Jobs’ “fanboys” who would buy anything and everything regardless of the need, the price and competition.
    Only Steve Jobs could convince people that he sells them “freedom” (from Big Bad Microsoft?) while in reality locking them up in his own “Apple Eco-system?”

    Without Jobs, will the “fanboys” keep buying every model of iPhone, or perhaps skip a generation? Without the Jedi mind tricks, will they still sign up for the cyber-prison of iTunes? Will they still pay $100 for additional 16GB of flash in the iPhone, when 16GB flash card cost $15 on amazon and can be used in any Android phone????

    Correct me if i’m wrong, but the final, the “ultimate”, the most user-friendly computing device shown to Jobs during his visit to Xerox PARC was… a hand-held tablet-shaped computer with touch-screen interface. If i remember correctly, that was *it*. The end of Xerox’s research. I wonder if in the next 2-3 years Apple can come up with anything other than evolutionary products… not really worth of price premium.

  11. streeteye says:

    Amazon is trying to pull a Google.

    Google clued in early that cloud/mobile was the future. They couldn’t cede a future where they had to pay Apple a vig to to get to their customers. Digitizing the world, and selling access to the customers is Google’s DNA. Getting between Google and the users is like getting between a dog and its bone. So they came up with Android. For all the hoopla about iPhone, Android is selling more devices, and the Samsung Galaxy S II is arguably as slick or slicker than iPhone 4. (no Siri and not much of a tablet splash – yet).

    Now Amazon is, among others, in the business of media distribution. If iPads and Android tablets take over the world, how long will it be before everyone is buying ebooks and movies directly from publishers on their iPad, and disintermediating Amazon?

    So you have 3 business models – Apple makes money the old-fashioned way, by selling premium slick hardware, with an assist from media and software through iTunes. Google gives the platform to hardware manufacturers for free and sells access to the users. Amazon wants to own media distribution and retail on the device. (I can easily see them buying Netflix). They are basically a software as a service platform for retail and media distribution and for that matter any online business.

    I don’t know which one dominates, they might coexist for the long term. I think what Amazon has done in the SAAS/retail business is stunning but they’re in a narrow-moat low-margin ghetto, stock is expensive, and not at all clear they can extend their model to become a top-tier device player.

  12. Livermore Shimervore says:

    btw, I think if Samsung can sell their 7″ tablet for about $300 (eventually) it will be a much better value than the Kindle Fire by a wide margin. The Samsung tablets allows blue tooth tethering to your non-apple phone or laptop so you can keep using your browser once you’re out of wifi reach. And the storage is not even close, the Kindle will not allow you to store a very extensive list of movies and TV shows. And if the 7″ Samsung is anything like the razor thin 10″ on and size and form factor then it beats the Fire on portability as well. And of course Android Market has not expelled Kindle in App book purchasing like the Apple unfair trade committee has, so you get the same experience with the Fire as you would with the Samsung as far a purchasing Amazon Kindle content. One advantage of the Fire is text to speech. That’s a very under rate (and free) feature for listening to magazines, blogs and books that do not have an audio book version.

  13. [...] Barry Ritholtz, “Amazon says its building for the future, and to some degree, that has been true. The problem is its been true for 15 years, and the future has pretty much arrived.”  (Big Picture) [...]

  14. paulie46 says:

    “The *only* reason AAPL is able to sell products like their 1st iphone (no 3G, crappy camera, no memory slot) for that outrageous price is because of Steve Jobs’ “fanboys” who would buy anything and everything regardless of the need, the price and competition.”

    Didn’t Apple sell more iPhones to Windows users than Mac users?

  15. ilsm says:

    Kindle is similarly less than Nook…………………………………………

  16. kcowan says:

    I think Amazon made the mistake of introducing hardware rather than supplying ereaders for Android and other platforms. DW has a Kobo and they have readers for a variety of platforms available free. They make it really easy to shop at their store for ebooks.

    When will Apple start to sell ebooks in their iCloud?

  17. NoKidding says:

    I got an iPad for my wife because I got sick of all the complaining about how things(fail to) work for her on the laptop. I’ve been watching the situation develop… My next laptop will be Apple.

    I think comparing Apple and Amazon is broadly a mistake. The companies have competing products, but Amazon is a retailer and its real competition is Walmart and Best Buy. Apple is selling access, and ultimately competes with Google.

  18. miamiocean says:

    and what was that again that Feliz Zulauf mentioned ? “Multiples will compress over this time period. Look at more than P/E — consider Price to Sales as well.”

    On the chance of being labeled a complete idiot (or further confirmation thereof), what does Multiples will compress” mean and is his comment relevant to this particular discussion ?

  19. Gene-OK says:

    Still, I love the products. Kindle is just great. I buy a lot more books now than I used to because of Kindle. (My guess is Amazon likes hearing this.)

    I want a Fire, badly, but I am going to wait and see how the device performs before I step in. (I guess that’s not what Amazon wants to hear.)

    I guess time will tell who’s correct on the financial prognostications.

  20. readerOfTeaLeaves says:

    I recall Amazon from the bad old days of doors for desktops, working on emacs.
    Bleh.

    But I don’t think other commenters are aware of some tech issues related to shifts in reading habits. eBooks are now comprising 20% of all book sales.

    Amazon is competing for authors against Big Six publishers, who are finally waking up and starting to create imprints for specific authors. This is one of many fundamental shifts in publishing:
    http://www.businessweek.com/technology/publishers-what-are-you-doing-while-amazon-eats-your-lunch-10182011.html

    Consider that 20% of total book sales are now being read on devices, and then consider that tablets are still being adopted (although it appears that avid readers are first to buy tablets). From early Oct 2011:
    http://www.shelf-awareness.com/issue.html?issue=1579

    Shockingly, the digital transformation of the book world was the top subject at conferences held before the official start of the Frankfurt Book Fair today…

    Apple changed the rules in July 2011 regarding which eReaders they would permit on iPad/iBook, and how easy it would be for users to **purchase** books from those apps. For instance, I have a B&N Nook app on my iPad. But Apple is now going to make it tough for me to use that app to purchase directly from B&N. I can do it, but it’s more complicated, meaning that I’m far more likely to do the default go-to-iBookstore-and-buy-what-I-want…
    From July 2011:
    http://www.idealog.com/blog/publishing-is-living-in-a-world-not-of-its-own-making

    …Amazon and Barnes & Noble sold many Kindles and Nooks, of course (Kobo’s device has been a competitor and Google is about to have one), and they’d be selling lots of ebooks if there were no iOS devices. Publishers know that, of the 55-65 percent of their ebooks sales that go to Amazon and 20-30 percent of their ebooks to Barnes & Noble, some of those sales go to the dedicated devices and most of the rest to the iOS devices. But they have no idea what the split is. Now they will start to find out as they see those sales shift from the other retailers to the iBookstore. (Sales to iBookstore, Kobo, Google, and others constitute no more than 15-20 percent of sales and often far less.)…

    Because Amazon will only allow agency terms to the Big Six publishers (they have ways to offer a competitive 70% share of sales, but they won’t play ball with giving up control of pricing), because some publishers aren’t comfortable with the agency model, and because the iBookstore has not been as aggressive about sourcing content as their competitors… there are publishers selling to the other players and not to Apple…

    My sense is that Amazon treated publishers (and therefore a lot of authors) like disposable trash and demanded a 9.99 price point for eBooks that was all about Amazon and to hell with the publisher’s needs.
    The brilliant first move on Apple’s part was to let publishers set their own prices. Apart from the technical complexities of ePublishing, my sense is there is still — at least in some quarters — a lot of goodwill toward Apple.

    A lot of commentary that I read and see seems to leave out ‘the human factor’. If you view business as a sequence of human relationships, the companies who treated publishers more decently should do well over the longer term. From what little I glean from my periphery spot, that would be Apple and B&N.

    But Amazon is still formidable, and a lot of their success will still rely on Silk working smoothly.

    I’m betting that since Netflix uses Amazon’s cloud to stream their video, we’ll see the Netflix streaming get scarfed up by Amazon in the next two years or so, but that’s just my random guess.

  21. dead hobo says:

    BR asked:

    Is Amazon the Latest Victim of Apple?

    reply:
    ——————
    No. Amazon is running a business, Apple is running a cult.

  22. RC says:

    I think it is the other way around. The Fire will kill iPad. iPad costs more than double and does the same thing as the Fire. Besides once the Fire becomes ubiquitous and the volumes increase it will be profitable even at $199. But this will only be apparent in January 2013, that is two December holiday seasons later.

    Laptops that were sold for $500 and above 2 years back are now selling for as low as $250. Same thing will happen with Tablets. I cant believe how can anyone justify the huge price tag that iPad carries other than admitting that it is fashion accessory. Dont say “Apps”. That would be laughable. The only App that tablets need is called the web browser and now HTML5.
    I am constantly amazed at this “App” model. How is it more efficient to install software from so many different vendors onto my SmartPhone/tablet?? It is so promiscuous. It is like inviting someone into your house to rob it. Astonishing!!!

  23. fp says:

    “Amazon is running a business, Apple is running a cult.”

    LOL, it seems Apple’s cult is vastly more profitable than Amazon’s business. At Amazon’s P/E of 88, compared to Apple’s P/E of 14, I think Amazon investors are the cultists here.

  24. dead hobo says:

    fp Says:
    October 26th, 2011 at 3:10 pm

    At Amazon’s P/E of 88, compared to Apple’s P/E of 14, I think Amazon investors are the cultists here.

    reply:
    ———–
    Apple sells crippled items at premium prices. Amazon hustles for customers and figures out how to fill needs. I spend tons on money with Amazon but have yet to buy anything from Apple. Granted Apple’s innovation has benefited everyone, but so have Napster’s. Benefits come from unexpected places. I’m looking forward to my uncrippled Kindle Fire with the IPS screen. The iPad is still overpriced and semi-functional. Computers are commodities. Apple without mystique is Nokia.

  25. constantnormal says:

    1) Amazon is *not* a competitor to Apple. Amazon is a retailer that (with the exception of the Kindle) does not make anything that they sell. Apple is a hardware manufacturer, that also runs a retail chain that sells only what they make or selected 3rd party products that support Apple’s products.

    2) Amazon is principally a retailer, secondarily a publisher. Neither of those industries is noted for high margins.

    3) Amazon is selling the Kindle basically “at cost” in order to gain market share in book and magazine sales. It is not intended to undercut iPad sales, as iPads generate a fair amount of traffic in Amazon book sales. No sane business goes to war with someone who sends customers to your primary business.

    4) Amazon was (and still is) valued as if it were a high-margin, high-growth tech company. I’m not sure how much credit buyers of AMZN get for being half-right.

    The company is doing a fine job, and continues to cement its role as the “Wal-Mart of the web”. But it is still over-valued, and will either grow into the valuation or continue to correct that valuation do something real.

  26. TennesseeCPA says:

    Thanks for your points. Love, love Amazon as a customer. But as an investment they’re like the cable companies. If they ever make a dollar they spend it on upgrading the lines, or equipment and investors are left gawking at “surprise” losses.

    If I’m going to give you something now for free, then I’d better have a lotta faith in the sticky stream of revenue I hope to generate from you. Otherwise, customer fickleness, and my competitor’s innovation, and the time value of money will be my downfall. Especially worth remembering at lofty stock price multiples. Apple, on the other hand, gives away nothing and can constantly self-fund their innovation. Remember how Toyota/Lexus used to be.

    But love Amazon – they’re building 3 distribution centers in good ol’ Tennessee.

  27. econimonium says:

    Haha Amazon is a business and Apple is a cult! You said it! It will be very, very interesting to see Q4 figures from Amazon and from Apple. I have a feeling Amazon is going to siphon of a lot of buyers from iPads for the holidays (Hey, I was going to buy 2 of them for family and instead ordered Fires because they have Kindles already). And if they don’t like them the 200 bucks doesn’t make me feel like a chump.

    The question of the century is: are tablets a fad that will flame out? What exactly do people want with them? Are they willing to keep buying “premium”ones over more modest utilitarian media consumption devices? That remains unanswered until the iPad has a serious contender, and I think now it does.

    More interestingly, is Amazon poised to become a total content delivery provider from movies right through to newspapers? What happens if even 1/3 of Netflix customers become Amazon customers?

  28. Robert M says:

    Amazon is the new sock puppet. When i saw the sock pocket would sell you 25lbs of dog food for less than it cost to ship and shipping was free I laughed my ass off at the stupidity. Then someone came up w/ web food stores. Amazon is only the next in a long line of ideas that see fruition because someone says net. Even Barry Eisler books, he who has a self publishing deal w/ amazon, has his books on sale on Amazon.

  29. donna says:

    Amazon did themselves in with their ridiculous treatment of their California associates. Pissed me off so much I haven’t oredered anything from them in ages.