Amazon - Fire Phone Consistent With The Goal To Reinforce Its Ecosystem

Jun.19.14 | About: Amazon.com, Inc. (AMZN)

Summary

Amazon.com announces the Fire phone.

Some cool new features, but pricing at par with the iPhone is slightly disappointing.

All of this is consistent with the long term vision of Bezos, boosting the value of the ecoystem and general merchandise operations.

The word is finally out. In a move which could make it a competitor of both Apple (NASDAQ:AAPL) and Samsung (OTC:SSNLF), Amazon.com's (NASDAQ:AMZN) latest product is the Fire Phone.

While I don't necessarily believe that the phone will become a home-run, the move underlines the strategy to boost the ecosystem. I continue to like Bezos' long term vision, yet find it hard to estimate the true potential earning power of the firm.

The Fire

On Wednesday, Amazon.com introduced the Fire Phone, which will become available on the 25th of July. AT&T (NYSE:T) will be the exclusive wireless carrier with the phone costing $199 accompanied by a two-year contract.

Important to notice, the phone will initially only be available within the US where Amazon.com's other services are most developed. The phone is tailored to operate optimal within the company's ecosystem, including image-recognition tools. Customers will furthermore get unlimited photo storage and a one-year free Prime membership subscription.

As such Amazon.com aims to probably not target the masses, yet it focuses on reinforcing its ecosystem, making its loyal customers even more profitable.

Cool Features, But What About The Price?

The Fire has some cool features as Amazon.com has focused more and more about hardware. A crucial new introduction is ¨Firefly¨ the image-recognition technology which can quickly recognize over a 100 million items, directly taking consumers to the Amazon.com shop to order the product or service. This even includes video and audio recognition abilities in order to buy digital media.

The screen images furthermore have 3-D technology creating an illusion of real vision, boosting the experience not just for shopping but for games as well. By tilting the screen people can actually scroll through pages without actually touching the screen.

Some commentators are disappointed by the price, given Amazon.com's tradition to sell hardware at cost, while earning money in the store business. The 32 gigabytes version will cost $199.99 including a two-year contract, while the 64GB version will be a $100 more. A phone without a contract will be at $649, similar prices to Apple's 5C version.

Despite the cool new features, Apple and Android run phones have the benefit of far more extensive applications and features.

Shift To Hardware And Mobile

For Amazon.com this seems simply another step having transformed from a book retailer, to an online merchandise retailer. Ever since it has focused on e-books, e-readers, Prime, tablets and even set-op boxes as well as cloud services.

With more shoppers moving from the desktop to the mobile, controlling the interface at which it offers its products in the main merchandise business is crucial. A widespread adoption of the Fire will do just that.

Valuing Amazon - Focus On Optimizing Long Term Free Cash Flows

Amazon.com ended its first quarter with $8.7 billion in cash and equivalents while holding $3.1 billion in debt, resulting in a $5.6 billion net cash position.

At $334 per share, equity is valued at $154 billion which values operating assets at $148 billion. This values operating assets at 1.9 times trailing revenues of $78.1 billion and a non-meaningful profit multiple based on trailing earnings of $300 million.

Free cash flows are a much more meaningful $1.5 billion. Even at those metrics shares are very expensive on traditional valuations metrics.

Through Growth And Slim Margins

Despite the impressive size, Amazon.com is still growing at a rate of 23% in the first quarter of this year. Margins remain razor-thin at just 0.5% of net sales.

This is as the company is happy to accept losses in its hardware ventures, Prime, most likely the Kindle, Amazon Web Services and foreign operations. On top of that is the long term but expanding test trials with grocery delivers, one of the few retail market still underrepresented by the internet.

Given that it must have been quite an undertaking to develop the Fire, it is safe to assume margins could have been much higher in recent quarters as the company must have been incurring sizable costs to develop the phone. This does not just apply to the Fire, but to all of its ¨experimental¨ and long term oriented investments.

The very wide range of activities in which Amazon.com is experimenting and trying to gain share is an attempt to build economic moat, making sure the company remains relevant in the future.

Takeaway For Investors

In all honesty I don't see the Fire being a major disrupter, given the equal pricing with the iPhone, despite having some cool new features. Yet it once again shows Amazon.com's commitment to boost the ecosystem and sacrifice long term gains over short term pains.

This is after the company has faced significant pressure from some investors urging the company to focus on earnings. Despite a recent recovery shares are still down about 15% for the year, underperforming the wider markets.

Back in April when Amazon.com reported its first quarter results, I last checked out the prospects for the business. I concluded that investors still firmly believed in Bezos and his long term vision to dominate key consumer areas backed by cheap shipping, related technology and great service.

I noted that some investors started to become disappointment and less tolerant to the lack of earnings, which has pressured shares a bit. Given the lack of financial information provided by Amazon.com it has always been very difficult to guesstimate how much higher potential profits could be compared to reported earnings.

While I like the announcement, Fire has a lot to prove. I remain on the sidelines.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.