Amazon's Fire Is Breaking Through

Introduction

Amazon (NASDAQ:AMZN) continues to hold near its all-time high around $770, setting records in both share price and profit. In fact, it has broken its own profit records the last two quarters in a row, and the P/E ratio has actually fallen to 191 even as the stock has risen. Still a ways to go yet, obviously, but things seem to be coming together.

With good news so prevalent for Amazon lately, what with AWS and Prime and Marketplace, some other news that would usually be front and center seems to be getting pushed aside. I am talking about Amazon's tablet sales.

Another Strong Fire Quarter

It is hard to win in any sport if the star player only shows up for one quarter. That, in nutshell, has been Amazon's problem in the tablet market ever since Fire launched all the way back in 2011. It's tablets sold in the holiday quarter, then took a knee the rest of the year. Some years were better than others, as far as holiday sales, but sales the rest of the year were almost universally dismal.

The first indication that things were starting to change came in April, when IDC released its 1Q2016 global tablet sales figures. Amazon had already had a solid holiday sales period that saw them in third place, behind only Apple (NASDAQ:AAPL) and Samsung (OTC:SSNLF) respectively. But most were expecting the typical post-holiday fade in the new year. Instead, for the first time Amazon held the third-place position.

One quarter does not a trend make, of course, so I was very eager to see how second-quarter sales played out. This month IDC finally announced 2Q2016 numbers, and guess what? Amazon is still going strong, with sales up more than 12 times what they were last year.

The Fine Print

There is one asterisk to this. Last year, Amazon's hot new tablet product was the Fire HD6, a six-inch LCD tablet. It was the first time Amazon had built a full-color tablet the same size as its popular Kindle E-Reader line, and Amazon insisted at the time that customers were responding well to the offer. Others were more skeptical.

IDC was no help last year, because its own metrics define a tablet as a seven-inch device or more. It simply didn't capture those sales in its stats. Amazon was offering the larger Fire HD7, however, as well as its Fire HDX 8.9, a more high-powered version of its tablet line. And IDC did have numbers on those: they were performing atrociously. In fact, Amazon's tablet sales fell below 50,000 units in 1Q2015, good for a 0.1% market share.

But Amazon insisted that the numbers weren't that bad. The only way that could be was if the HD6 was selling like gangbusters. Which apparently it was. While IDC was reporting that Amazon's tablet sales were up times 12, CEO Jeff Bezos, never one to miss an opportunity to trumpet a sales bump, merely claimed that they had "more than doubled."

Less Discounting

Even this, however, is enough to make Amazon a truly pivotal player in the tablet space for the first time. Tablets are a shrinking market, and yet Amazon is "more than doubling" sales. The only other growing player in the tablet space of any kind right now is Huawei, and at around 80% even they lag far behind Amazon in growth rate. Meanwhile Apple and Samsung, previously the undisputed masters of the space, are both seeing shrinking sales.

Even more interesting is the inversion in how first-half sales are distributed. Historically, first quarter was the worst for Amazon tablet sales, with second quarter sales bad but not as bad. This year, that too seems to have reversed, with Amazon selling over 2 million tablets in 1Q2016, good enough to keep third-place in the space behind Apple and Samsung, while in 2Q2016 it fell to a still-respectable 1.6 million, good for fifth place as Lenovo (OTCPK:LNVGF) and Huawei pulled ahead.

One possible explanation for this, however, might be that Amazon is doing worse by doing better. Historically, because Amazon sold so few tablets in first quarter, it often resorted to heavier promotional activity to clear inventory in the second quarter. This year, with better sales in the first three months of the year it may not have been quite so desperate to move product.

A Different Kind Of Buyer

The significance of these sales goes beyond their mere numbers. A sale of a tablet in the non-holiday period is, in some ways, more valuable to Amazon than a holiday sale of the same tablet. The reason is that unlike Apple and Samsung, Amazon is still reaching for a stable foundation in the tablet market.

Fire has long been dismissed as "the fruitcake of tablets" . What people bought for others as gifts but didn't want for themselves. Amazon's holiday-heavy sales performance was certainly evidence that this criticism had some merit.

By the same token, however, its new post-holiday strength is also evidence of customer perspective. Which appears to be changing. With far fewer gifts being handed out now, customers appear to be growing more and more attracted to Fire. It is not just good enough for their kids or their relatives. It is good enough to be their tablet.

Competitor Impact

This is important, and for more than just what it does for today's sales. Happy customers bring a product line prestige and positive reinforcement via word-of-mouth. They enhance Fire not just as a device, but as a brand, which in turn makes the product more appealing to others and increases the chances for further sales. Amazon may have just started yet another virtuous cycle, what Bezos calls a flywheel. Better devices sell better, lead to more brand power, lead to more sales which enhance the brand still further.

How this would impact the different brands incumbent in the space is not yet clear, and presumably it would impact different competitors differently. Over the holiday period, Apple appeared to be struggling the most, with sales declines higher than Android makers like Samsung and Lenovo.

However, in the last two quarters that trend appears to have reversed, with Apple sales in the most recent quarter only down 9% year over year according to IDC. Samsung, meanwhile, posted another double-digit decline, as did the "Other" category which is presumably composed almost exclusively of Android (NASDAQ:GOOG) tablets. So now it appears that Amazon is eating into Alphabet's cake more than Apple's. The fact that Amazon uses a forked version of Alphabet's own OS only rubs salt in the wound.

Conclusion

Amazon is generating somewhere between 100% and 1000% unit sales growth, in a product market which is not only maturing, but actually shrinking. Even if it does not yet deserve to be held in the same class as Apple, that is a real achievement. I believe it heralds further positive growth for Amazon in the future, and I remain bullish on the stock.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Amazon's Fire Is Breaking Through