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Summary

  • Amazon launched its Fire phone Wednesday.
  • This is all about expanding the Amazon moat.
  • The phone is not an Apple killer.
  • Amazon is starting to show profitability and cash flow progress.
  • Continued progress needs to be made. This phone could help.

On Wednesday afternoon, Amazon (NASDAQ:AMZN) did launch a new phone, the Fire. The bull and bear debate over this phone will rage on, with the long-term impact to be decided over the next couple of years. Today, I'm here to provide my thoughts on the phone, and why I think this move was a necessary one for the company.

The new Fire phone:

When it comes to any new product launch, the details will be key. Here's a brief list of key features:

  • A 4.7 inch display with 13MP rear camera.
  • A Qualcomm (NASDAQ:QCOM) Snapdragon CPU (2.2GHz, quad-core).
  • A new service called Firefly that recognizes 100M plus items.
  • A 3D UI, called "dynamic perspective".
  • An unlimited cloud photo storage service.
  • AT&T's (NYSE:T) site states a 32GB model will go for $199 with a 2-year contract.
  • Amazon is also offering 12 months of Prime free for a limited time, or will add a year to your service if you already are a member.

Since everyone wants to know what this means for Apple (NASDAQ:AAPL), here are a couple of items to consider. Apple provides 5GB of free iCloud storage to iDevice owners. Additionally, the 16GB iPhone 5S currently goes for $199. Obviously, Apple is just a few months away from launching its next set of phones, which could be two new larger screen phones. Amazon states that you can experience the Fire at AT&T stores on July 25th.

There is an important debate to have here when it comes to Amazon versus Apple. Amazon is not trying to duplicate the iPhone's success in terms of tens of millions of phone sales per quarter. Amazon may not sell more than a few million of these phones a year, if that. Apple sold nearly 44 million iPhones in its latest quarter. Apple generated more iPhone revenues in its latest quarter than Amazon had total revenues. That's how big the iPhone is.

What Amazon is doing here is something that Apple has really done well. This is all about building and expanding a moat. We saw Amazon go into tablets, and now the company is going into smartphones. It's not just about getting people to order stuff through the website. The company is also increasing its offerings for Prime, with Amazon recently launching a music service for Prime. Over one million songs are supported. Prime has also beefed up its video library in recent months, highlighted by a deal with HBO. Amazon did raise the price of Prime from $79 to $99 a year, and we recently saw a price raise from partial competitor Netflix (NASDAQ:NFLX) as well. Amazon's Prime reportedly has over 20 million subscribers.

Improving the bottom line:

Yes, I know that Amazon is barely profitable. I've covered that angle of the company in great detail in recent years. However, Amazon is starting to make strides in that department. The company did lose money in 2012, although that was partially due to equity investments and taxes. On a pre-tax basis, Amazon had a profit that year. Even with pre-tax profits declining a little in 2013, the company did report a profit for the year.

Amazon did increase its net income in Q1 2014 over the prior year period, and the 12-month trailing value rose as well, according to the 10-Q filing. Perhaps more important was that for the trailing twelve month period ending Q1 2014, Amazon reported a $1.1 billion rise in operating cash flow, as opposed to the prior year period. Capital expenditures and acquisitions were also down, so free cash flow was up a bit.

We know the analyst game of starting out with really high estimates and then cutting them as Amazon comes in with guidance. Over the last 90 days, Amazon's EPS estimate for 2014 has come down from $1.92 to $1.07, after a profit of $0.59 last year. Amazon is certainly trying to boost its profitability in some respects, and a move into online payments could help with that. Analysts are looking for a $3.21 profit in 2015, although that number has come down by more than a dollar in the past 90 days. Do I think Amazon will have more than $3 in EPS next year? Not at this point, but if some of these efforts start to pay off, profitability should start increasing a bit. Remember, Amazon doesn't even have half a billion shares outstanding, so every $100 million of profit is about 21 cents of EPS.

Final thoughts:

Amazon launched its Fire phone on Wednesday, the next move to build out the Amazon ecosystem. Apple makes a ton of money off the iPhone, but Amazon doesn't even need to duplicate iPhone margins for the phone to work. Amazon's gross margins were less than 29% in the latest quarter, and at times, iPhone margins have run at twice that level or more. If Amazon can make some profits from the phone, combined with a buildout of the moat, this phone will be worth it.

Source: Amazon Is Not Phoning It In

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