- Amazon, Facebook, Apple, Google, Microsoft aren't staying within their comfort zones, and several projects in the past have proved that. Amazon Fire is an example of that.
- It's a good phone. Dynamic perspective could go on to be used by developers. And Firefly is a very useful shopping device, not just for users, but also Amazon itself.
- But a move into the smartphone market may concern investors, as smartphone companies are trading at pretty low valuations. Can the move justify a P/E of more than 100x?
There was a time when you knew what was what. You knew who did what. Turfs were clearly marked. It was sort of like the feudal system. Google (NASDAQ:GOOG) (NASDAQ:GOOGL) was a search engine, Apple (NASDAQ:AAPL) was a higher-end, wider profit-margin hardware manufacturer, Facebook (NASDAQ:FB) was a social network, Amazon (NASDAQ:AMZN) was a superstore, Microsoft (NASDAQ:MSFT) made operating systems and a suite of licensed office software.
Then things started changing. Apple started peddling digital content (Amazon's turf) with the iTunes and AppStore. So did Google. Both, primarily through the mobile phones that their operating systems were powering. Amazon started getting into the digital content business itself, though giving the likes of Netflix (NASDAQ:NFLX) more sleepless nights than Apple or Google. Microsoft went ahead and bought Nokia (NYSE:NOK), and Windows phone is emerging as a formidable alternative to iOS and Android. Amazon developed the Kindle, which still reigns as the king of e-readers and the Kindle Fire, an economy tablet that wasn't as much of a game-changer as its simpler sibling.
Not all the forays into each other's turfs have been as successful as the ones listed above. Google's venture into social media (first, Orkut and then Google Plus) was a dud. Facebook's partnership with HTC (OTC:HTCKF) to develop a Facebook phone was a disaster.
It is in that tradition that Amazon has come out with its Fire smartphone. Which of the above two categories it is going to come under is anyone's guess. I think it'll be a success. Read on.
So, what's new here?
On the surface, it might seem like just a nice, respectable phone with solid parametric performance. I mean, it has a 4.7-inch display, a 13 megapixel camera and an impressive 2.2 GHz quadcore Snapdragon 800 CPU under the hood. Good, but good enough for people to buy it? And it's not just that. The Fire OS is built upon the basic plumbing of Android. But Android apps need to be tweaked by developers (just a bit) to run on Fire OS. Why would they?
So, the question is: what's new, then?
This is the feature that is talked most about. The reason why people are calling it a "3D" phone. Its four front facing cameras track your retinas and appear to give an image depth; images change when you tilt your head.
The dynamic perspective might win in the ooh-shiny! competition, but it is Firefly that probably spells out Amazon's basic reason for coming out with a phone. The app can recognize physical objects (and not just QR codes), songs, even dialogues within movies and TV shows, which you can then instantly buy on Amazon. For loyal users, a boon. For others, not so bad.
Why it can fail
Well, there are several reasons. First of all, it is expensive. It has priced itself at iPhone 5S levels. It has a (AT&T (NYSE:T)) contract price of $200. Which segues into the second problem: non-AT&T users would have to pay up the full $650.
It is a physically bulky phone in an era where other phones are getting slimmer. The upcoming iPhone 6, for instance, is rumored to be a svelte beauty.
And as mentioned before, Amazon's app store doesn't have as many apps. True, minor tweaking with Android apps can make them Amazon ready. But would those developers think it worth their while?
Why it can succeed
If the dynamic perspective is proprietary technology and others are kept out of the fray, this could definitely make Amazon some money. It might seem like a toy now, but when it is followed by developers building apps and games for it, we're looking at a must-have toy.
Firefly: Amazon isn't in the smartphone game merely for the sake of it. It is here to streamline a revenue source. And, yes, customers, even loyal Amazon ones, are able to shop on Amazon using other phones, but this makes shopping extremely easy. A click, or two. No searching for a particular product. And it prompts you to buy new products.
But it's not just sales of the smartphone that matter. "In business," says legendary investor Warren Buffett, "I look for economic castles protected by unbreachable 'moats'." By opening up a new revenue store for its existing megastore, Amazon is widening its moat. The larger picture of profits has to be looked at. If I were in Amazon's place, I would pay out of Amazon's own pockets and subsidize the phone as much as AT&T is doing.
What this spells for the stock
The answer to that, of course, is to be determined by the number of people who use the phone. But at the moment, Amazon stock is stable. It is hovering above $332 right now.
Not a fabulous jump or anything, so should investors be getting worried? Not, really. You see, Amazon has a very high P/E ratio. This ratio of more than 100x means it is in the overvalued (debatable) category.
What that means is that even keeping the stock stable -- at a time when people are wondering whether it is overvalued -- would be an achievement by the phone.
At the same time one might start thinking, if I can buy Apple's shares at a P/E of 15x, why should i buy another smartphone player i.e., Amazon, at 100x?
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.