Will The New Kindle Keep Amazon's Rally
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Amazon.com Inc. (NASDAQ: AMZN) has recently launched its Kindle Fire HD that ranges between the price of $199 and $499; the new Kindle Fire is trying to reach the first tier of tablets right along with the iPad. Will this new Kindle be more successful than the previous generation of Kindle Fire? Based on the recent hype around the iPhone 5, if the next iPad will generate such enthusiasm this could jeopardize the potential success of the new Kindle Fire HD. For now, Amazon's shares continue to outperform the NASDAQ and S&P500. But there are some uncertainties the company might be facing during the year that could impede the company’s progress. Let's examine what is next for Amazon and will it be able to keep outperforming the market.
Will the new Kindle Fire HD contribute to the growth in sales of Amazon or just keep Amazon’s current share in the tablet market? According to the recent reports Apple Inc. (NASDAQ: AAPL) sold nearly 5 million iPhone 5 in the past three days; if the new iPhone sales are any indications for the hype over the next release of the iPad, which is rumored to come out between the end of 2012 and the first quarter of 2013, then this could suggest that Amazon will find it hard to increase its market share in the tablet market. Especially after the boot the company had received from Wal-Mart.
Wal-Mart (NYSE: WMT) announced to stop selling Amazon’s Kindle products. This decision came after another major retailer Target had also stopped carrying the Kindle line of products. Nonetheless these announcements aren’t likely to have a strong impact on Amazon’s sales of Kindle seeing that many of its Kindle customers are still coming from its own website that offers free delivery of any of the Kindle products within the U.S (so no apparent reason to drive to a store in order to purchase a Kindle). There might be some impact in the short term that could lower the sales, but again I guess the effect won’t be strong to pull down by a sharp margin the sales of Kindle products. Nonetheless, it certainty won’t help to the growth of Kindle sales.
Further, the recent success of Apple to sell its iPhone 5 won’t help its competitors in the tablet market including Amazon. The newest Smart-phones, such as Samsung Galaxy 3 and iPhone 5, have larger screens than the previous generations and thus can also compete with tablets.
Financial Reports for Q2 2012
According to the recent financial reports of the company for second quarter of 2012, the revenues rose by nearly 29% compared to the parallel quarter of 2011. On the other hand, the company's operating profitability has declined from 2% in Q2 2011 to 0.83% in Q2 2012. One of the reasons for the decline in operating profitability was the rise in the company's research and development provision that rose by nearly 55% in Q2 2012 compared to the parallel quarter of 2011. This could suggest that the company is working to expand its product line but if the profit margins won't pick up it could eventually start to adversely affect the company's stock.
S&P500 and Amazon
Let’s also check how Amazon has performed during 2012 compared to the S&P500 just to get a point of reference. As seen in the chart below, during 2012 (UTD) the company has outperformed the S&P500 mainly soon after the end of first quarter of 20012 following the publication of the company's financial reports for first quarter of 2012. Keep in mind that the linear correlation between the stock price and the S&P500 (daily percent changes) is strong: during the past couple of months the linear correlation between the two reached 0.69. This means, under certain assumptions, nearly 48% of Amazon's volatility could be explained by the changes in S&P500. Therefore, not only the good financial reports of Amazon pulled up the stock price, but also the rise in the markets helped pull up Amazon's stock.
The Bottom line
Even though the company’s sales increased during the second quarter, even though the company's stock has risen in recent months, and even though the company has launch its newest product, there are some uncertainties the company will face and one of the more interesting ones will be whether the new Kindle Fire can increase the market share in the tablet market especially in a market where Apple still dominates. If the company won't be able to increase its market share in the next several months, this might eventually adversely affect the company's shares.
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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.