Kindle Shown the Door
Sharmistha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Wal-Mart (NYSE: WMT) has pulled the plug on Amazon.com’s (NASDAQ: AMZN) Kindle.
The move echoes its closest national competitor Target Corporation’s (NYSE: TGT) decision to stop offering the Kindle in May this year. However Wal-Mart will continue to offer its customers a broad assortment of tablets and e-readers and accessories like such as Apple’s iPad tablets and Barnes & Noble’s Nook at a variety of great price points."
The move comes just ahead of the busy holiday season, a time when high-profile products like Kindles are in demand and the retailers generate up to 40 percent of their annual revenue during this period.
Over the past several years, retail in America has changed dramatically. Wal-Mart, the biggest U.S. discount retailer, holds a market cap of $187.9 and Target Corporation, with $34.6 billion, faces tough competition.
Compared with the broader stock market, Wal-Mart's stock performance has been tremendous. While the Standard & Poor's 500-stock index has tumbled almost 9% so far this year, Wal-Mart shares rose 21%.
For years, Warren Buffett's investment in Wal-Mart looked like a blunder. The legendary investor and chief executive of Berkshire Hathaway bought almost 20 million shares in the world's largest retailer in 2005 and spent three years watching that $944 million investment go almost nowhere. Now, Buffett's patience is paying off. Wal-Mart's stock recently hit a four-year high, providing Buffett a 22% return.
Although Target is one of the ten largest retailers in the U.S., with yearly revenues of $69.86 billion in 2011, it comes nowhere close to touching Wal-Mart's worldwide brand recognition. Wal-Mart is one of the world's most recognizable store names, and despite the competition, it is still a safe stock with a good dividend payout. Wal-Mart has arguably succeeded in spite of the tough times. It is believed that the chain will continue to see these positive trends.
Amazon shares dropped after news of Wal-Mart dropping Kindle products was digested. The shares were down 0.9 per cent to $259.41 recently.
Why did Wal-Mart drop Amazon? One theory is that Amazon’s online retail business has simply become too strong a competitor for Wal-Mart, and has become a more attractive consumer retail destination, and therefore it was inevitable that Target or Wal-Mart would stop selling the Kindle. Amazon's margins on selling Kindle are believed to be thinner than those of other gadget makers, in particular Apple. As a result, Amazon may not have much in the way of profits to share with retailers and speculated as another reason for the decision.
Do they perceive Amazon as a potential threat? Does this really matter? Of course, it is inevitable that the loss of Wal-Mart will result in fewer Kindle products sold. That said, Amazon is a retail powerhouse in its own right, and it’s safe to assume that Amazon.com is a popular destination for those looking to pick up a Kindle device. While the retail giant often trumps competitors in overall sales it is believed that Wal-Mart trails Amazon in e-commerce and is working towards bigger online profits.
However the reality is that the Amazon stock price has fallen. Not because current profits have fallen, but because there is an uncertainty about the future profits of the company.
Although Amazon reported revenue of $13.18 billion, a 34 percent increase over the quarter a year ago, and the stock up more than 40% are encouraging from the company’s point of view, the stock seems richly priced. It seems that investors are getting too caught up in the enthusiasm about Amazon's Kindle business and its small but growing cloud services division.
What about other healthy, mass market retailers? Wal-Mart and Target both trade at earnings multiples in the mid-teens based on earnings estimates for their next fiscal year. Does Amazon really deserve a P/E that's more than 7 times higher than these two?
Amazon's net margins in the first half of 2012 was only 0.5% although it declares to have captured 22 percent of U.S. tablet sales over nine months. This compared to Wal-Mart's net margins in the first six months of the year were 3.4% and that of Target's were over 4%. The good news about Wal-Mart is that it still holds a place as one of the two largest online consumer electronics outlets in the United States, rivaled only by Amazon and Best Buy. Wal-Mart’s ecommerce business grew at or above ecommerce rates in the United States during the first half of the year, taking market share from competitors.
Amazon has to prove to Wall Street soon that all its investments will one day lead to higher profit margins if it wants to remain in the competition.
Wal-Mart Stores is optimistic about its prospects. The retail environment is getting very aggressive. One way Wal-Mart is trying to boost its growth is through its website, which offers free shipping with certain minimum purchases and waives shipping fees for shoppers who pick up their items in a Wal-Mart store.
Many investors argue Wal-Mart has learned lessons from past missteps. It has slowed store growth in the U.S, and increased its diminishing return and focused on growth overseas. If you are looking for a good, safe consistent stock in this volatile market, Wal-Mart is a good stock to invest in.
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