Apple Lags As Amazon Fires Up the Competition

As it currently stands, after reports of a 25% reduction in iPad supply orders, Apple's (AAPL) stock has been lagging the S&P500 by more than 4%. That's despite the fact that today, major news sources are scrambling to ease investors by highlighting the fact that J.P. Morgan analysts' iPad sales projections remain steady.

Apple Starting to Lag the S&P by Wide Margins

It is worrying for me that everywhere I look I am seeing extremely rosy projections of Apple's shares soaring. While most of it is well deserved, I prefer more caution in the headlines.

Of course the reasons for the supply reductions are unknown, and the Street dances with various stories, ranging from Apple being a badass by ordering in excess to lock up the supplies, pushing out the competitors and lowering the suppliers' price quotes, to the eerie thought of lower than expected demand for one of Apple’s biggest growth prospects.

Speculations like those are only good for entertainment. Such stories may be prompting investors to take a second look at prospects for Apple's iPad, but it's unlikely that the stock's recent price action has been caused by the supply cuts.

While the tablet market is growing rapidly and will continue to do so, there is not much room higher in terms of market share when you are holding nearly 80% of the market.

Previous attempts to compete with the Apple iPad have failed because they typically offered inferior hardware and software at slightly lower price points than the iPad. The consumer wasn’t very enthusiastic on saving 20% by parting with the quality of experience of an iPad. However, there is finally a competitor that is actually making economic sense.

TechCrunch reported today that at Amazon's (AMZN) press event this Wednesday, the online retail giant will unveil the Kindle Fire (Kindle 7). According to Venture Beats:

Amazon’s Kindle Tablet will likely retail for $250 and come with a free subscription to the company’s Amazon Prime service, which costs $79 a year and offers perks like free two-day shipping and access to a library of instant video. Unlike an iPad, the Amazon tablet will feature a 7-inch screen and runs a heavily customized version of Android 2.2.

This time Amazon’s price point could be insanely compelling. It would be a 50% discount from the iPad and includes free Amazon Instant Video Services (most likely for a limited time). It’s now easy to picture how it can make a dent in Apple’s tablet market share. There will definitely be a portion of buyers who are only looking to use the iPad as an e-reader/browser that will be attracted to the value of Amazon’s tablet. The Street will be waiting with bated breath to see the details of Amazon's new device.

Survey of Reasons for Owning an iPad (Nielson)

The impending announcement of large players coming into the tablet market and competing on price is a real headwind for AAPL's share price. However, keep in mind that this is still a temporary headwind that is making for a good consolidation period for AAPL.

My next article will look at the real reasons behind AAPL's low valuation as well as a roll yield update on various ETFs I'm tracking.

Disclosure: I am long QLD.

Additional disclosure: I have no positions in any stocks mentioned, but may initiate a position in AAPL, VXX, GLD, SLV.