Amazon Fire Phone: A Confirmed Bust

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

Summary

Amazon has recently marked down its 32GB Fire phone to a lowly 99 cents. The Fire phone debuted at $199 last July.

The Amazon Fire phone has failed to legitimately compete against premium phones out of Samsung and Apple.

Conservative investors should consider immediately selling out of Amazon stock. The Amazon bait-and-switch business model does not result in real profits.

On September 8, 2014, online retailer Amazon (NASDAQ: AMZN) aggressively slashed the price of its 32GB Fire phone to a lowly 99 cents, if customers agree to the terms and conditions of a two-year service contract with AT&T (NYSE: T). The 99-cent fire sale price is a far cry from the July 25 launch event when Amazon first pitched these Fire handsets to the market for $199.00. The near immediate and drastic price reduction may confirm rampant speculation that the Amazon Fire campaign has already degenerated into an outright bust. Going forward, Amazon's bait-and-switch business practices will fail to generate real shareholder value.

Amazon Fire Specifications

The Amazon Fire handset weighs in at 160 grams, while also standing 5.5 inches tall by 2.6 inches wide. The Fire features a 4.7-inch screen that presents graphics in 720 X 1280-pixel resolution. This smartphone may also convert into two separate cameras that snap pictures through 2.1 and 13-megapixel sensors. Beneath the Fire hood, a Qualcomm (NASDAQ: QCOM) Snapdragon 800 chipset packages a quad-core CPU that achieves 2.2 GHz clock speeds. Google (NASDAQ: GOOG) (NASDAQ:GOOGL) also has supplied Amazon with a forked, or highly specialized, version of Android. Still, it would appear that the Amazon Fire lacks the killer, or revolutionary, application to compete against premium smartphones already out on the market.

For its part, Amazon initially pitched the benefits of Firefly and Dynamic Perspective technologies for its Fire phones. According to Amazon, Firefly is capable of recognizing 100 million separate movies, songs, television shows and consumer goods. Meanwhile, Dynamic Perspective offers rotating and three-dimensional sightlines of localized scenery, with the help of multiple cameras and infrared LEDs. Still, legions of technology reviewers promptly ripped Amazon for its "gimmicks." Apparently, Firefly was simply another tool for Amazon to drive traffic toward its online store. In his June 19 Extreme Tech piece, an incredulous Sebastian Anthony openly wondered, "who in their right mind would buy Amazon's Fire phone?"

Amazon, of course, is now literally giving away another portal into its ecosystem after having marked down the Fire handset to 99 cents. A Fire handset purchase would also include one full-year of Amazon Prime services, which normally retail for $99.00. With Prime, users may maintain access to more than 40,000 movies and television shows, 500,000 books and one million songs. Most importantly, Prime allows for the free two-day shipping of Amazon product.

If anything, the Fire will serve a niche market of diehard Amazon loyalists. Ironically, Amazon may have alienated this core group after marking down the Fire to 99 cents within 45 days of launch. In fact, a finger wagging Larry Dignan and ZD Net recently ordered Jeff Bezos and Amazon to issue apologies alongside $198 gift cards to early adopters who bought in to this Fire debacle.

Amazon Shut Out of Mobile

On September 5, 2014, research firm comScore published its July 2014 U.S. Smartphone Subscriber Market Share report. Be advised that the title of this report was somewhat misleading, as comScore statisticians actually presented averages of data taken from the calendar quarter that spanned between May and July. Any quick review of the comScore July 2014 information would highlight the presence of the dominant Google Android - Apple (NASDAQ: AAPL) iOS duopoly above the mobile market.

According to comScore, Android (51.5%) and Apple (42.4%) systems combined to operate 93.9% of the U.S. smartphone market through this latest quarter. Meanwhile, Apple and Samsung have both emerged as a respective one and two, in terms of market share, atop successive smartphone and tablet original equipment manufacturer lists. From here, Microsoft (NASDAQ: MSFT) will likely entrench Windows further as the third-wheel alternative to the Android - iOS duopoly. Microsoft has averaged $28.75 billion in annual operational cash flow for five years running.

The Amazon Fire phone, again, runs upon a forked version of Android. As such, Fire phones arrive with pre-installed Amazon applications, rather than popular Android programs. The Fire phone features Silk Browser, Amazon Appstore, and Cloud Drive, instead of Android standbys Chrome, Play Store, Gmail and Google Drive. The aggressive markdown to 99 cents, of course, may confirm that the marketplace has already rejected this Fire version of Android.

Earlier this month, Apple unveiled its iPhone 6 and iPhone 6 Plus handsets at a launch event in Cupertino. The iPhone 6 Plus screen measures out at 5.5 inches, diagonally, and this design marches in step with the secular consumption shift toward larger phones and phablets. The iPhone 6 Plus, of course, would compete directly against the Samsung Galaxy Note 4 into and beyond the looming 2014 Holiday Season. Online magazines Pocket Lint, Tech Radar and Huffington Post each identified the Samsung Galaxy Note 3 as the best phablet out on the market heading into 2014. Certainly, this next wave of premium handsets out of Apple and Samsung will lock Amazon further out of the mobile market, in light of its recent Fire bust.

The Bottom Line

Amazon, for its part, has yet to break out Fire phone sales figures. A July 29 report out of research firm IHS posted estimates of $205 in bill of materials and manufacturing costs for the 32GB Fire phone. These IHS estimates, however, do not include research and development and selling, general and administrative costs for the Fire phone that now retails for 99 cents. Going forward, Wall Street should expect massive asset write-downs related to the weak Fire launch. Last year, Microsoft took $900 million in Surface RT inventory charges after its very own high-profile technology flop.

Still, Amazon stock closed out the September 17 trading session at $324.00, which also calculated out to approximately $150 billion in terms of market capitalization. In 2013, Amazon generated a mere $274 million in net income off $74.5 billion in sales. For now, Amazon has already racked up $18 million in losses upon $31 billion in net product sales through the first six months of 2014. Going forward, Amazon may close out the 2014 year having generating a mere $150 million in profits. Be further advised that Amazon fiscal years do coincide with calendar time.

Again, Amazon shares are wildly overvalued, according to various financial metrics. Amazon shares now trade for an estimated 1,000 times current earnings. For the sake of comparison, rival technology stocks Apple, Microsoft and Google all trade for between 15 and 30 times current earnings, while the underlying businesses have actually expanded sales and earnings performance in recent years. Conservative investors should consider immediately selling out of Amazon stock in order to avoid a massive price correction in shares over the next year.

Disclosure: The author is long AAPL.

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.

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