Amazon: The Twitch Acquisition Is, For Now, Highly Irrelevant

Aug.29.14 | About: Amazon.com, Inc. (AMZN)

Summary

A lot of attention was given to the Twitch acquisition.

As always, people that are blind to the next quarter envisioned rivers of honey flowing in the years to come.

It can be shown, though, that the impact from the Twitch acquisition pales when compared to the impact from the Fire Phone bombing.

Again, as is customary with Amazon.com (NASDAQ:AMZN), a great fuss was made about the $1 billion Twitch acquisition. It again served to pump the stock up a couple of percentage points, not as much as with the Fire Phone, but still impressive given the penny stock-like reasoning to the move.

Yet, in comparison to the Fire Phone, this Twitch acquisition is, at least for now, highly irrelevant. The relative impact of the Twitch acquisition on revenues and earnings is most probably as follows (using optimistic assumptions):

  • Revenues: Around $100 million in 2014, $150 million in 2015. This, again, being highly optimistic about the whole thing;
  • Earnings: Around $10 million in 2014, $25 million in 2015. Again, being out-of-this-world optimistic about the whole thing.

But then, let's think a bit about the Fire Phone massive failure. The Fire Phone is on track to sell 100k-200k units, instead of the 2-3 million units analysts expected. I'll round it down and say the phone is on track to sell 2 million units less per year than expected. What are the impacts from this? Using a pessimistic ASP of $500 (including the AT&T subsidy) and a margin on each of 50%, this is what we come up with:

  • Revenues: Around $1 billion less than expected, or 10 times an optimistic projection for Twitch.
  • Earnings: Around $0.5 billion pre-tax less than expected, or 20-50 times the impact from Twitch.

These numbers are self-explanatory. The impact from the Fire Phone bombing is massively larger than the impact from the Twitch acquisition, even if Amazon.com ultimately does not make a blunder with that acquisition as well.

So again, why are people ignoring the elephant in the room - the Fire Phone bombing - and looking at the gnat (Twitch). It makes no sense.

Finally, the proof is in the pudding. How much did the earnings estimates for Amazon.com move up on the Twitch acquisition? Nothing. They didn't move. People talk about the massive potential to come, but apparently such potential and $5 more will get you a latte at Starbucks.

Disclosure: The author is short AMZN.

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.