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Summary

  • Amazon recently launched its Fire smartphone into an already crowded marketplace.
  • The Fire handset lacks the specifications to steal share from the likes of Apple and Samsung. Critics have likened Fire applications to "gimmicks."
  • Amazon bait-and-switch tactics do not translate into real growth. Amazon stock deserves a sell rating.

The Amazon (NASDAQ: AMZN) Fire smartphone finally hit retail shelves late last week. Early reviews on the Fire phone, however, may be described as tepid, at best. For Modern Readers, Lorenzo Tanos referred to the Amazon Fire phone simply as "satisfactory." Alternatively, Credit Card Forum President Ben Woolsey dismissed the Fire handset as a "Trojan Horse," where its telecommunications features were supposedly "ancillary" to operations. The Fire will be the latest in a long line of Amazon bait-and-switch tactics that will ultimately torpedo the stock.

The Saturated Mobile Market

In early July, comScore published its May 2014 U.S. Smartphone Subscriber Market Share report. The title of the report, however, was somewhat misleading, as comScore statisticians actually presented averages for data compiled for the quarter spanning between the months of March and May. A quick review of the May 2014 U.S. Smartphone Subscriber Market Share report would reveal the presence of a dominant Android - iOS operating system duopoly above the mobile market.

According to comScore, Google (NASDAQ: GOOG) Android and Apple (NASDAQ: AAPL) iOS systems operated respective 52.1% and 41.9% shares of the U.S. smartphone market, through this latest quarter. On the handset side of the ledger, comScore identified Apple as the leading original equipment manufacturer, in terms of units sold. Successive reports out of research firm IDC have presented a similar duopoly structure to the tablet market.

In mobile, Microsoft (NASDAQ: MSFT), with its deep pockets, has emerged as a distant third wheel alternative to iOS and Android. For its part, Microsoft recently closed out upon its $7.2 billion Nokia acquisition, in hopes of building out the Windows ecosystem. On average, Microsoft has generated $28.8 billion in annual operational cash flow, over the course of the past five years. The Microsoft cash haul and marketing apparatchik may easily crowd out any remaining mobile competition.

The Fire handset will run upon a forked, or highly customized, version of Android. The Fire OS is more so geared towards the integration of Amazon applications, instead of Google software. Extreme Tech has reported that the Fire phone will arrive preloaded with Silk, Amazon Appstore, and Cloud Player, instead of Chrome, Google Play, and Gmail. Typical Android consumers will likely balk at the lack of access to familiar applications via Fire - and remain loyal to Samsung. The Fire may therefore only serve a limited niche market of the most faithful Amazon consumers.

Amazon Fire Specifications

Ben Woolsey and his aforementioned "Trojan Horse" commentary were an allusion to the bait-and-switch business tactics out of Amazon. Amazon is generally notable for giving away hardware product at cost, in order to drive traffic towards the Internet portal and additional online sales. A December 2013 report out of Consumer Intelligent Research Partners calculated that Kindle owners spent $1,233 per year at the Amazon site, as opposed $790, by customers who do not own this tablet. The 8GB Kindle Fire HD tablet begins at $139. For the sake of comparison, the 16GB Apple iPad Air retails for $499.

The Fire Phone launch and pricing, however, has been somewhat of a breach Amazon protocol. As a carrier, AT&T (NYSE: T) now maintains exclusive rights to market and sell the Fire handset. In effect, AT&T does offer $450.00 in subsidies per handset, if customers agree to the terms and conditions of a two-year service contract with the carrier. An unlocked, 32GB Amazon Fire does retail for $649.00. From there, consumers who demand more storage capacity may step up and purchase the 64GB Fire phone for $749.00. Alternatively, an unlocked 64GB iPhone 5S now retails for $849.00. The iPhone 5S, of course, will be sold at a steep discount, immediately upon the iPhone 6 launch - likely scheduled prior to the 2014 Holiday Season.

To sweeten the deal, Amazon is also offering one full and free year of its Prime service ($99 retail value) to Fire owners. The Prime membership guarantees access to complimentary two-day shipping of Amazon product and 500,000 free e-books, alongside what the online retailer has described as "unlimited" music and video streaming. It is doubtful that Google Play and Apple iTunes customers will exit these virtual stores, in favor of this $99 Amazon Prime value. The National Retail Federation ranked Apple Stores / iTunes as the 15th largest American retailer, in terms of U.S. sales, as a standalone entity heading into 2014.

Again, Amazon Fire handsets have been priced to compete directly against premium offerings out of the likes of Apple, Samsung, Microsoft - Nokia, and BlackBerry (NASDAQ: BBRY). At this junction in time, Amazon Fire specifications are noticeably inferior to the market leading 5S, let alone the next-generation iPhone 6. Amazon does promote the Fire as the only smartphone with Dynamic Perspective and Firefly technology. Firefly technology recognizes more than 70 million books, albums, video games, and household goods. From there, Firefly can drive traffic towards the Amazon web portal. Amazon critics Sebastian Anthony and Richard Taylor, however, have already dismissed the Dynamic Perspective and Firefly technologies as "gimmicks."

According to Anthony, 3D viewing via Dynamic Perspective offers up limited "peeks" around objects. Taylor, in his recent BBC piece, ripped into Firefly technology as a somewhat shameless attempt to shoehorn consumers into Amazon online sales.

The Bottom Line

Apple is coming off a 2013 fiscal year when it shipped 150.3 million iPhone handsets. Amazon may sell one million Fire phone units over the course of the next year, for $750 million in marginal revenue, at best. A failed Fire launch would do nothing to reverse the maddening zero-growth trends at Amazon. Trojan Horse bait-and-switch tactics are not to be confused for real profitability. In three short years, Amazon revenue more than doubled from $34.2 billion to $74.5 billion, between 2010 and 2013. Meanwhile, Amazon net income actually declined from $1.2 billion to $274 million, through this same 2010-2013 time frame.

On July 25, Amazon reported financial results for the second quarter of its fiscal 2014, which also coincided with calendar time. For the quarter, Amazon racked up $126 million, or 27 cents per share, in net losses off $19.4 billion in revenue. The prior year, Amazon posted $7 million in losses and $15.6 billion in Q2 2013 revenue. Wall Street clearly was not pleased with the news, as traders unceremoniously dumped Amazon shares to $324.01, for a 9.6% loss on the July 25 session.

Still, Amazon is worth approximately $150 billion, in terms of market capitalization. Amazon, however, has already tallied $18 million in net losses, through the first six months of this year. Amazon may close out 2014 with $500 million in profits on the books, at best. As such, Amazon now trades for an estimated 300 times current earnings. Amazon's lack of real growth, as characterized by the failed Fire phone launch, does not justify said egregious stock market valuations. Conservative investors should consider immediately selling out of Amazon shares, in order to avoid severe losses over the next 12 to 18 months.

Source: The Amazon Fire Phone Will Fail