Kindle Fire or Not, Amazon’s No Better Value Than Apple

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This past week, Amazon (NASDAQ:AMZN) introduced the Kindle Fire, its $199 tablet that undercuts Apple’s (NASDAQ:AAPL) iPad by $300. Somebody finally is stepping up to the plate to challenge Apple’s turf. The news makes for good theater, but it really doesn’t change anything. Apple will continue to sell millions of iPads at inflated prices, and everyone else will have to make do with lower-priced imitations. This is not a category-killer justifying Amazon’s lofty price. If I was a shareholder (and I’m not), I’d be selling Amazon at this point and buying Apple instead. Here’s why.

What Has Changed?

Apple has one more competitor. So what? Trefis.com values Apple’s stock at $510, with the iPad accounting for approximately 12%, or $56.7 billion. Meanwhile, the iPhone accounts for 54% of its overall value. If this were a shot across the bow of its phone business, then I’d be worried.

Research In Motion (NASDAQ:RIMM) shipped 200,000 BlackBerry PlayBooks in the second quarter, half as many as expected. Price cuts are under way, and with a little work, you can get one for as little as $200. Unfortunately, for that price you get a product with very little to offer in the way of working Android applications. Hewlett-Packard (NYSE:HPQ) discontinuing its TouchPad tablet certainly hasn’t helped. Versions are available for as low as $99.

Besides Research in Motion, the big losers in Amazon’s move are tablet players like HTC and Samsung (PINK:SSNLF), Barnes & Noble (NYSE:BKS) with its Nook color e-reader, and Netflix (NASDAQ:NFLX) with e-content like streaming, etc. Counterintuitively, this might actually help Apple because if the Fire is remotely successful, consumers will begin to see that there really are only two players in the tablet market.

State Sales Tax

I have a hard time understanding Amazon’s argument that it shouldn’t be required to collect state sales taxes. Standing behind a 1992 Supreme Court ruling that prohibits states from forcing a business to collect sales taxes when it doesn’t have physical stores there, the decision was made at a time when e-commerce wasn’t nearly as prevalent as it is today.

In Canada, where there is a harmonized federal/provincial sales tax in Ontario and three Atlantic provinces, both taxes are collected together and remitted to the federal government. In the other provinces and territories (with the exception of Alberta, which doesn’t have a sales tax), the provincial tax can be collected by the online retailer but generally is left up to the customer — which almost never happens because it’s impractical to enforce province-by-province. Americans might have a problem paying taxes, but really, it’s more an argument about fairness.

Let’s say you are a retail establishment in the state of Illinois. Every person who shops in your store pays the 6.25% Illinois sales tax. Customers shopping at an Amazon affiliate (prior to cutting ties with its affiliates in the state) located in Illinois do not. As in Canada, prior to individual states cracking down, the customer could remit the taxes to the state of Illinois. Most did not. Therefore, this gave an unfair advantage to Amazon, often at the expense of local independent retailers.

Perhaps more interesting is the fact Amazon will sell its 7-inch tablet at Best Buy (NYSE:BBY) locations including those in Illinois, who will collect the tax. This hardly seems like a level playing field, and it’s one that will be flattened either through cooperation or in the courts. Either way, Amazon will be hugely affected, hence why it’s putting up such a fight. The Fire might help generate decent revenue, but the state sales tax issue will continue to weigh on its stock price.

Valuation

Forget for a moment about which company has the better product or whether Amazon should be required to collect taxes in states where it doesn’t have a presence, and instead just think about these two companies’ valuations. It will take Amazon 11.5 years based on its current earnings growth to earn its current share price of $216. a, on the other hand, will take just 5.8 years to pay back $381. Apple’s EBITDA is 10% of its enterprise value, compared to 2% for Amazon. And finally, AAPL’s cash return, which Morningstar defines as free cash flow less interest expense divided by enterprise value, equals 8.8%, compared to 1.9% for AMZN. By every metric except price-to-sales, Apple is a much better deal.

Bottom Line

With as much uncertainty as currently exists in the markets, I have no problem recommending Apple as a safe haven. The same can’t be said for Amazon.

As of this writing, Will Ashworth did not own a position in any of the aforementioned stocks.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.


Article printed from InvestorPlace Media, https://investorplace.com/2011/10/kindle-fire-amazon-apple-aapl-stocks-to-sell/.

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