Is Kindle Fire Good for Amazon?

By Lior Cohen - August 21, 2012 | Tickers: AMZN, AAPL | 0 Comments

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I recall in a recent episode of the Colbert Report, Steven Colbert announced he had bought the new iPad and a kindle-fire and then said:” perhaps I will use it [kindle] as a coaster [for the iPad].” I think this punch line is something that many think has a kernel of truth– Amazon’s Kindle is considered inferior to the iPad. Even if you don’t accept this premise, it’s still worth examining whether Kindle Fire was a good investment for Amazon.com Inc. (NASDAQ: AMZN). Let’s explore this issue in detail.

Financial Reports for Q2 2012

According to the financial reports of the company for Q2 2012 there was a rise in sales but a drop in profitability. The company’s operational profitability reached 0.83% during the second quarter compared with 1.46% profitability in the previous quarter. This is part of a long term downward trend in profitability. But even if the company is selling Kindle Fire at cost it doesn’t affect much the bottom line. Amazon’s sales reached $12.8 billion during Q2 2012, while the total sales of Kindle Fire reached an estimate of $240 million which means only 1.9% of the company’s total sales. Therefore even if the company is selling this product with no profit it doesn’t hurt much the company’s profit margins. But is the Kindle Fire helping the company to grow?      

Is Kindle an Inferior Product?

According to IDC’s review the Kindle fire market share in the tablet market has shrunk during recent quarters while other competitors’ market share didn't decline: Apple Inc. (NASDAQ: AAPL) maintained its part, and Samsung expanded its market share.      

I won’t be too theoretical but it is worth noticing that some may consider Kindle Fire an Inferior good. This means that as income increases, the sales of this product will tend to decline. The ongoing growth – even if it is low – of the U.S economy and increase in jobs suggest there is a rise in income in the U.S. If this theory is correct, then it means that as the income tends to increase the demand for inferior good drops. Let's examine the numbers:

There was a drop in sales from Q4 2011 to Q1 2012 of not only Kindle Fire but also iPad due to a seasonality effect, but according to IDC the share of Kindle Fire tumbled from 16.8% in Q4 2011 to 4% in Q1 2012, while the share of the iPad has risen during said time. 

Further, after Amazon had reached the second place in tablet sales in Q4 2012, the company declined to third place in Q2 2012, after it lost its second place to Samsung that sold 2.4 million units; Amazon sold 1.2 million units during that quarter. Amazon didn’t gain back its market share that remains under 5% as of Q2 2012. The rise in competition adversely affected Amazon’s market share but didn’t seem to affect the market share of iPad that remained at 68%.

When it comes to the tablet market, one could say it’s a positional good, where Apple’s iPad is a top tier while the Kindle fire is second tier. Further, the difference in these two products’ prices – an iPad starts at $499 while Kindle Fire at $199 – makes people consider Kindle Fire less attractive than an iPad in terms of hedonic pricing. The decline in Amazon's market share in the tablet market could suggest that Kindle Fire is considered an inferior good.

Therefore, in such a market it will be hard to bounce back and gain the market share Amazon had lost unless it will convince us its product is just as good as an iPad.

NASDAQ and Amazon

Let’s also check how Amazon has performed during the year compared to the NASDAQ just to get a reference. As seen in the chart below, during the year (UTD) the company has outperformed the NASDAQ. This was mainly due to the sharp rise in Amazon's stock during the end of April when the financial reports for Q1 2012 came out. The rise in sales may have contributed to the rally of Amazon’s stock price. Keep in mind that the linear correlation between the stock price and the NASDAQ (daily percent changes) reached 0.4 (during 2012). This means, under certain assumptions, nearly 16% of Amazon's volatility could be explained by the changes in NASDAQ. But the majority of Amazon's rally didn't come for the rise in the NASDAQ but from its financial performance. This also means, the drop in sales during Q1 of Kindle Fire didn’t contribute to Amazon's rally.  

The Bottom line

Even though the company’s sales were not affected, for now, by the decline in Kindle Fire’s market share, even though the company continues to show profits, and even though Amazon’s stock has done well compared to the NASDAQ, the Kindle Fire isn’t helping - it isn’t too damaging either – the company in the short term. Perhaps Amazon will benefit if it would reconsider its strategy in the tablet market: instead of offering a low priced tablet, it should re-brand its tablet to something that could compete with Apple’s iPad as a first tier product.

For further Reading: Is Chesapeake walking towards the right path?

Disclaimer: The author holds no positions in stocks mentioned and does not plan to initiate positions within 120 hours of the posting of this article. This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact.

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