Amazon Smart Phone Is A Not-So-Smart Idea

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 |  About: Amazon.com, Inc. (AMZN), Includes: AAPL, BBRY, GOOG
by: Investanomics

Many analysts expect Amazon (NASDAQ:AMZN) to release a smartphone in the fourth quarter next year. Citigroup was able to get its hands on a research report that tied Amazon to Foxconn International Holdings, a contract manufacturer of smartphones. You would believe that after the release of a tablet, it would make sense for Amazon to release a smartphone in order to increase its distribution. I don't view a smartphone as a good move for the company.

Amazon could be opening itself up to a lot of trouble if it does try to enter the smartphone business. Unlike the tablet market, I feel that an Amazon smartphone will have difficulty gaining a foothold against much older and stronger rivals. HTC, the world's number four smartphone maker, recently forecast no growth for the fourth quarter, compared to 20 to 30 percent growth in the same quarter in previous years. HTC is citing stronger competition from Apple and Samsung as a reason for the shortfall.

Another big issue I see for Amazon is distribution. Amazon usually likes to sell its devices through its website. This is compared to smartphone manufacturer's selling its devices through wireless carrier stores. If Amazon were to bypass this arrangement, it would be at a huge disadvantage over other manufacturers. Google previously tried to sell its Nexus One device directly to consumers through its website. That move turned out to be a disaster, with the company unprepared to handle customer service issues. Google has since moved to purchase Motorola Mobility (NYSE:MMI) and will most likely continue the relationship of selling its devices through carrier stores. (The Google buyout is still waiting on government approval.)

Amazon would also have to change its strategy to compete in the smartphone market. Amazon normally competes by selling devices at a small loss in order to entice consumers to purchase its devices. Unfortunately, free smartphones are a common theme nowadays.

It may still be too early to tell the fate of the Amazon smartphone, but the prospects aren't bright. Dell (NASDAQ:DELL), HP (NYSE:HPQ) and Garmin are just a few companies that have tried to enter this market and failed. Now former shining stars like RIM's (RIMM) BlackBerry and HTC are starting to fall to intense competition.

Amazon has a good thing going with its Kindle lineup, and should just focus on that. I'm still bullish on Amazon despite the smartphone rumor, and view pullbacks as a buying opportunity. I expect the Fire to be a much bigger hit than many are giving it credit for. Some analysts have already begun to increase shipment projections for 2012. I also expect Amazon to benefit from a strong holiday shopping season this year. Comscore estimates online shopping to increase 15 percent this year. Amazon should easily hit its net sales guidance of $16.4 to $18.6 billion in the fourth quarter.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AMZN over the next 72 hours.