Amazon (AMZN) on its continued quest for growth, announced the 5th generation of Kindle devices Thursday afternoon. The new devices look appealing, and CEO Jeff Bezos' presentation was incredibly informative. Yet, the question remains: will Amazon become more profitable?
On hardware, that appears unlikely. The 7-inch Kindle Fire HD packs a punch with strong processors, MIMO/dual antenna technology and 16 gigabits of storage that will retail for $199. After reviewing the presentation (link above), we think the new Fire HD will be an incredibly popular device. The Kindle Fire already accounts for 22% of tablets sold, and we suspect another new, powerful device will pad that market share. We wouldn't be surprised to see the Fire take the number 2 slot behind the iPad (AAPL) but ahead of all competitors ranging from the Surface (MSFT) to the Galaxy. The integration of the Kindle with Amazon.com might only be bested by the iTunes store/iPad combination.
Bezos stated, "We want to make money when people use our devices not when people buy our devices." That's a far cry from Apple's high-margin hardware business. However, we remain a bit skeptical of this statement. Though we agree that Amazon likely loses money or breaks even on devices, we haven't seen the firm profit much from its media. The company's second quarter operating margin was a whopping 0.83% (33.04% for Apple). The iTunes store is only a little better than breakeven, according to Apple CEO Tim Cook, and it tends to charge higher prices for media (especially songs) than Amazon. Thus, we don't think "use" will necessarily translate into better profitability.
Amazon's ultimate plan is to lose money in the short run, put all competitors out of business and then raise prices; or, the firm wishes to simply grow revenues with no real focus on profits. We're not in doubt of Amazon's ability to sell more items, but we do question the firm's commitment to making money. Regardless, the company is second only to Apple in the amount of disruption it has caused in its industry. The high-margin tablet market could be next.
Ultimately, we think shares of the e-commerce giant are fairly valued at current levels. Please click here for our extensive valuation analysis on the firm as well as how we think about the firm within the context of our stock selection methodology. The new generation of Kindles could be a huge success, but it won't move the needle on the firm's intrinsic worth, in our view. At over 300x earnings and no clear long-term profit outlook, we aren't adding shares to the portfolio of our Best Ideas Newsletter at this time.