Amazon Fire Phone Is No Apple iPhone Killer

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

Summary

Amazon is set to release its Fire phone on July 25th, 2014.

Amazon Fire phone specifications will not convince consumers to leave the Apple ecosystem.

Conservative investors should consider selling out of Amazon and buying into Apple stock.

The Amazon (NASDAQ:AMZN) Fire has been set for United States launch on July 25, 2014. Credit Card Forum President Ben Woolsey, however, has already gone on record to thoroughly rip the Amazon Fire as a "Trojan Horse." Apparently, those critical of the Amazon Fire dismiss the handset as simply an extension of the online retailer's bait-and-switch practices. In 2013, a study out of research firm Consumer Intelligence Partners made the claim that Kindle tablet owners spent $1,233 per year at Amazon. For the sake of comparison, consumers who did not own any Amazon device spent $790 annually with e-tailer.

According to Mr. Woolsey, Fire telecommunications features are "ancillary" to operations. As such, the Amazon Fire was not designed to be in the same League as the Apple (NASDAQ:AAPL) iPhone, which has been often hailed for its superior technical specifications. Most likely, the Fire will simply serve a niche market of diehard Amazon customers. As such, conservative investors may consider liquidating Amazon positions, and buying into Apple for the long-term.

Amazon Fire Specifications

AT&T (NYSE:T) maintains exclusive rights to sell the Amazon Fire, as a carrier. AT&T will offer $450 in subsidies upon each Fire handset sold if customers agree to the terms and conditions of a two-year contract. As such, consumers may purchase a 32GB Amazon Fire phone through AT&T for $199.99. Without a service contract, an unlocked 32GB Fire phone retails for $649.99. From there, consumers in the market for additional storage capacity may up the ante and purchase the 64GB Fire phone for $749.00. In comparison, an unlocked 64GB iPhone 5S retails for $849.00.

For its part, Amazon is packaging one full and free year of its Prime service to Fire owners. Be advised that one full year of Amazon Prime membership retails for $99.00. Amazon promotes Prime as providing access to "unlimited" music and video streaming. Prime is home to more than one million songs, 500,000 e-books, and 40,000 screenplays. Perhaps most importantly, Prime membership also includes the complimentary two-day shipping of Amazon product.

Again, the Amazon Fire handset would compete directly against premium smartphones out of the likes of BlackBerry (NASDAQ:BBRY), Microsoft (NASDAQ:MSFT), Nokia (NYSE:NOK), Samsung (OTC:SSNLF), and of course, Apple. For now, the iPhone 5S generally retails for $100 above the Fire, at comparable levels of storage capacity. The iPhone 6, of course, is set for launch prior to the 2014 Holiday Season. In keeping with history, the iPhone 6 would ultimately assume the aforementioned 5S price points, while the older handsets are heavily discounted.

The Amazon Fire weighs in at 160 grams, while also standing 5.5 inches tall by 2.6 inches wide. In terms of physical dimensions, the Fire's vertical profile matches that of the standard smartphone and is not to be confused for a next wave phablet. The 4.7-inch Fire screen displays graphics in 1280 X 720-pixel resolution at 315 ppi. The Fire does convert into two separate 2.1 and 13-megapixel cameras. For comparison's sake, the 4-inch 5S screen projects images at 1136 X 640-pixel resolution at 326 ppi. The iPhone 5S may also convert into an 8-megapixel camera.

Amazon has already played up the installation Dynamic Perspective and Firefly technology within its Fire handsets. Firefly point-and-click technology can identify more than 70 million tracks, books, games, and household items. From there, Firefly can shoehorn traffic towards the Amazon web portal and targeted advertising links. Richard Taylor and BBC News, however, may dismiss both Dynamic Perspective and Firefly technology as simply "gimmicks." In a June report, Taylor intimated that Dynamic Perspective offers up relatively limited three-dimensional sightlines, while he also exposed Firefly as a rather brazen attempt to drive consumers towards Amazon online sales.

Apple iPhone Revenue

2010

2011

2012

2013

Q2 2013

Q2 2014

Apple Revenue

$65.2B

$108.2B

$156.5B

$170.9B

$43.6B

$45.6B

iPhone Revenue

$25.2B

$46.0B

$78.7B

$91.3B

$23.0B

$26.1B

iPhone Unit Sales

40.0M

72.3M

125.0M

150.3M

37.4M

43.7M

iPhone Revenue Per Unit Sold

$630.00

$636.24

$629.60

$607.45

$614.97

$597.25

iPhone Percentage of Apple Revenue

38.7%

42.5%

50.3%

53.4%

52.8%

57.2%

Click to enlarge

Source: Apple Investor Relations - SEC Filings

The iPhone has emerged as the central locus of control and gateway into an Apple ecosystem featuring telecommunications, gaming, computing, and entertainment. The iPhone generated 57.2% of total net sales during Apple's latest quarter, which ended on March 29, 2014. In comparison, the iPhone accounted for 38.7% of Apple revenue in 2010. That year, the iPod actually tallied $8.3 billion, or 12.7%, of Apple's $65.2 billion in total net sales. By fiscal 2013, the iPod platform had significantly deteriorated to post a mere $4.4 billion, or 2.6%, of Apple revenue.

The iPhone and iPad may have literally rendered the iPod obsolete, as the smartphone and tablet machines may also convert into music players. Be further advised that Apple iTunes, software, and services revenue have remained at roughly 10% of total net sales over the course of the past several years. Heading into 2014, the National Retail Federation ranked Apple Stores and iTunes as the 15th largest retailer in America, with $26.6 billion in 2013 U.S. retail sales. The ranking did compare favorably to Amazon, which placed ninth upon the NRF list, with $44 billion in 2013 U.S. retail sales. Apple's strength as a retailer and purveyor of digital content will further undermine any perceived competitive advantages of the Fire above the iPhone. Going forward, Apple is likely to leverage its $3 billion play for Beats Electronics to establish further synergies between Cupertino and Hollywood.

The financial statistics may serve as evidence that Apple has actually expanded its reach, while cannibalizing its own product. Apple loyalists, or fan boys, have simply refused to exit this ecosystem. As such, concerns that the iPhone 6 will harm aggregate sales have been very much overblown. The technology commentariat has suggested that the iPhone 6 will branch off into two separate 4.7-inch and 5.5-inch screen handsets. The iPhone 6 would touch upon the cusp of phablet territory, at these specifications. The term "phablet," of course, takes its name from the assumed integration of conventional smartphone and tablet features within one machine.

Misguided Apple bears have argued that the iPhone 6 launch will ultimately erode iPad sales growth. The bears, however, should recognize the idea that the tablet market will be more so defined by a relatively lengthy inventory turnover. Smartphone owners are likely to upgrade to new phones every other year, upon the expiration of two-year service contracts. As such, an expansion in iPhone 6 sales may not necessarily arrive at the expense of tablet demand. Furthermore, successive teardown reports out of research firm IHS may confirm that Apple has been able to leverage its immense buying power to drive down costs for component parts shared between the iPhone and iPad. Going forward, a slight expansion in iPad gross margins may counteract any weakness in demand.

The Bottom Line

Amazon stock closed out the July 16, 2014 trading session at $358.66 per share. At these levels, Wall Street traders have applied a $163.9 billion market capitalization price tag onto the Amazon business model. For its efforts, Amazon closed out its latest 2013 fiscal year having booked $274 million in profits. At current levels, Amazon trades for an outrageously pricey 600 times trailing earnings. Amazon bulls, of course, may suggest that growth stocks are associated with expensive valuations. In recent years, however, Amazon earnings have remained somewhat mired within a downward trajectory. For 2010, Amazon did generate $1.1 billion in net income off $34.2 billion in revenue.

The Fire phone will do little to nothing to alter the character of the Amazon business model. Again, Amazon literally dumps product on the market, in order to spur increased Internet traffic. Amazon's bait-and-switch tactics, however, have largely failed to trickle down towards real bottom line growth. Amazon revenue more than doubled from $34.2 billion to $74.5 billion between 2010 and 2013. Amazon net income, however, actually declined from $1.2 billion to $274 million, through this same 2010-2013 time frame. Again, conservative investors should consider selling out of Amazon positions, in order to avoid severe losses within the next 12 to 18 months.

In comparison, Apple now trades for a relatively cheap 16 times trailing earnings. Apple most recently listed out $150.6 billion in cash and investments upon its Q2 2014 balance sheet. Apple has also committed to return more than $130 billion in capital back to investors through share buybacks and dividends, by the end of calendar 2015. This aggressive capital return program will effectively install a price floor in Apple shares. Long-term owners of Apple stock may also take solace in the idea that the Amazon Fire handset is no iPhone killer.

Disclosure: The author is long AAPL. 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.