You're right, Amazon.com (AMZN) does not make a smartphone. The closest gadget it creates is a tablet, which has been a huge success. But Amazon created this before the tablet market had so many players. Developing a smart phone is the next logical step, and it has been inching ever closer to all the needed ingredients. Make no mistake, the idea of an Amazon smartphone is alarming to the big players Apple (AAPL), Microsoft (MSFT), and Google (GOOG). It should also strike fear into the already dwindling Nokia (NOK) and Research In Motion (RIMM), but those are largely out of the game at this point.
Two new developments point yet again to the widely rumored Amazon smartphone.
First, it was announced today that Amazon acquired 3D mapping start up UpNext for an undisclosed sum of money. As those of you who follow the industry will immediately note, this news come quickly on the heels of Apple using its own maps for iOS 6 and Microsoft using Nokia Maps for its smartphone. Sure, Amazon could have acquired UpNext for the Kindle Fire, but how many people use Kindle Fires as a GPS?
The financial motives to get in the smartphone game are huge. Smartphone shipments are projected to grow 38% year over year in Q2, adding to the already staggering grow of smartphones. If Amazon wants to remain a power house, it needs to develop a smartphone. Not surprisingly, announcement of this news has pushed Amazon's stock higher, leaving it only $2 below its YTD high and $16 below its 52-week range. I fully expect it the stock to reach a new high in the coming month.
The other major news is the development of an Amazon cloud music player, set to launch in July. Much to the chagrin of Amazon, the four major music labels have reached agreements very similar to those they have with Apple. If we use Apple as an example, Amazon can expect up to 30% margin on this device, which is significantly higher than what it earns by selling tablets. But that is the strategy. Give customers tablets and sell them high margin apps and entertainment. I anticipate it will take a similar strategy with a smartphone.
Financially, there are many positives and negatives with entrance into the smartphone market. The first and perhaps biggest negative is Amazon's P/E ratio, which currently sits around a staggering 188. Compare this to Apple's P/E of about 14, Microsoft's P/E of about 11, or Google's P/E of about 17 and Amazon appears to be shockingly overpriced. The Kindle Fire did not bring Amazon's P/E down, and I am beginning to think a smartphone won't either.
The main positive is the massive size of the smartphone market. Currently pegged at about 110 million users in the United States alone, a 38% increase would bring the size of the market to just over 150 users, or almost 1 in the people in the United States.
I think it is worth noting that on average, analysts are also very bullish on this stock. Taking averages, analysts rate Amazon as an 'overweight' with a $260 target.
As mentioned, every major player in the smartphone market has its own map software, or at least has a partnership that gives it access to map software. Thus, Amazon's acquisition of UpNext will really only hurt Google, which has already decreased the price of its Google Maps API by 88% since being kicked off of iOS 6. Increasingly, Google is being entering into low margin competition with Amazon, and the introduction of map software by Amazon will bring these margins even lower.
Microsoft stands to lose the most by an Amazon smartphone. Currently, Microsoft is set to launch Windows Phone 8, likely this Fall. The just happens to be the predicted launch of an Amazon smartphone. Sure, it is unlikely that these phones will be similar, but many project that Windows Phone will catch on quickly. Another smartphone launch with similar timing would really stifle solid market gains.
But perhaps the biggest threat to an Amazon smartphone is the launch of an iPhone 5. For Apple, this is almost a one-way competition. It will get many customers to purchase iPhones. They are not cheap commodity phones, so those who like them will purchase them. But, with a new exciting phone, it can potentially convert customers who would have gone for a Windows Phone or Amazon phone. With an approximately 32% market share that is rapidly growing, it does not seem like much can get in the way of the iPhone. I don't expect an Amazon phone to hurt iPhone sales but I expect a new iPhone to hurt potential Amazon phone sales. And it has the possibility to hurt badly.
Conclusion
Many signs point to Amazon developing its own smartphone. It will not revolutionize the market but it could really help Amazon's operating margins, currently at about 1.5%. If investors still sit well with its huge P/E of about 188, this stock could skyrocket in value. As mentioned, it has a price target of $260, or roughly a $30 increase. These are not Apple or Google numbers, but they are very promising.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
