Despite Amazon’s (AMZN) repeated earnings misses, investors have remained bullish, holding out for sunnier days as the company continues to invest heavily in infrastructure and product development. The theory is that painful expenditures and thin margins today will pay off in the long run by growing locked-in customers who will eventually drive revenue and profit.
Well, Amazon shows no sign of slowing up on the spending side: The new Kindle Fire HDX, two rumored smartphones and a set-top streaming box show a continued focus on capturing customers with proprietary hardware.
Here’s a look at what Amazon has planned for the future, and what these devices could mean for the stock.
Amazon released a trio of new tablets a few weeks ago. The Kindle Fire HDX series boasts high-density displays and beefy quad-core Qualcomm (QCOM) Snapdragon 800 processors. They’re significantly lighter than the previous generation and offer all-day battery life. The 7-inch Kindle Fire HDX starts at $229 — $100 less than Apple’s (AAPL) cheapest iPad Mini. While last year’s Kindle Fire lineup was competing largely on price, this year’s version isn’t just cheap — it’s at or near the top of the heap in terms of specs, too.
Apple’s iPad has taken a beating at the hand of tablets running Android OS, which now leads the pack in terms of market share, but Amazon’s Kindle tablets have also lost market share. According to IDC, in Q3 2012 Amazon was the world’s third-largest tablet vendor with a 9% share, but by August 2013 it had disappeared off the charts, slipping below fifth-place Acer.
Amazon smartphone rumors have been running rampant for the past year and are now focused on two phones under development at Amazon’s Lab 126. The device, code-named “Smith,” is reportedly equipped with four cameras that add 3D capability as well as the ability to grab an image of any product (no bar code required), send it to Amazon for identification and a quick link to buy it — on Amazon.com, of course. The second is a cheaper device that might be an ad-supported phone running the FireOS that powers Amazon’s Kindle Fire tablets.
Can those devices take off? It’s hard to say. Competition is tough in the tablet market, where the Kindle has to fight against Apple’s iPads as well as offerings from Google (GOOG), Samsung (SSNLF), Microsoft (MSFT) and a collection of discount players. And the smartphone market is even more brutal, which could make it difficult for Amazon to break in.
Reports are growing of an Amazon set-top box arriving in time for the holidays. If true, Amazon would face an established Apple in the living room, with its $99 Apple TV streaming box (on its third major revision since 2007), Roku’s popular streaming devices, the new $35 Google Chromecast, video game consoles with streaming video capabilities, and smart TVs with streaming video apps.
In the cloud, Amazon’s AWS is on track to dominate legacy IT providers. GigaOM cites a Morgan Stanley report that puts AWS revenues at $24 billion by 2022 and a Macquarie Capital report that has AWS commanding $38 billion of an overall $71 billion cloud services market by 2015.
However, big competitors like IBM (IBM) and Oracle (ORCL) will be gunning hard for AWS, and there is risk that commoditization of cloud services could lead to smaller players also making gains at Amazon’s expense.
Amazon isn’t immune to headwinds in the tech marketplace. Tablet sales are slowing — a major concern for its Kindle business. Amazon Prime has become a tougher sell, too, with increased competition for both customers and content — streaming video is being discounted in price and available on virtually any connected device, while content owners look for more money. Streaming video providers are increasingly turning to the expensive prospect of producing their own programming content or early-release exclusivity on movies to differentiate themselves.
Meanwhile, brick-and-mortar retailers like Walmart (WMT) and Best Buy (BBY) have refused to roll over and play dead. And as InvestorPlace editor Jeff Reeves points out, these competitors have fought back with online discounting that has started a race to the bottom, threatening Amazon’s already razor-thin margins. Other retailers are kicking Amazon’s Kindles out of their stores and removing the lockers that let Amazon customers have their purchases delivered to a secure store location instead of being left on a doorstep.
Given everything we know (and think we know), what’s the outlook for Amazon?
Despite the thin margins, frequently missed earnings and non-stop investment for a future payday that’s always off in the distance, AMZN is up 103% over the past four years. That’s a tough act to follow.
Retail sales continue to be under pressure, there’s little chance of margins improving, and Google is testing out same-day delivery for online purchases.
Meanwhile, the Kindle e-reader’s days seem numbered as single-purpose e-readers fall out of favor with consumers. The Kindle HDX series has the technical chops and the price to compete, but I can’t see Amazon climbing back to double-digit level tablet marketshare.
The smartphones? If they’re released, they are unlikely to upset the playing field — there are just too many good, cheap Android devices out there.
A set-top box? Amazon will sell some, but they’re trying to break into a crowded market with very big players who already feature low-cost hardware and big media libraries — it’s going to be tough to compete on price, functionality or selection.
AWS is the product to watch. Amazon won’t break out AWS numbers, but speculation is that the service is now hugely profitable. Amazon lost nearly $40 million in 2012 on revenue of $61 billion; if you were to insert high-margin AWS revenues like the $24 billion or more suggested, Amazon suddenly looks much more deserving of its current valuation.
If AWS starts contributing in a big way to the bottom line, AMZN can keep on its upward trajectory; if not, I can’t see investors’ patience lasting much longer, and I don’t see anything in the current and rumored hardware pipeline that would dramatically change that equation.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.