Amazon Phone Could Ratchet Up The Risk

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Amazon Phone Could Ratchet Up The Risk
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The rumors that Amazon.com, Inc. (NASDAQ:AMZN) is about to launch a smartphone have been running rampant for some time. Baird analysts don’t believe it would be a smart move for the online retailer, although they also think that a low-cost Android phone would be the best chance for Amazon to build any kind of meaningful share in the mobile market.

Too many risks in an Amazon phone

In a report dated May 2, Baird analyst Colin Sebastian said while he understands Amazon.com, Inc. (NASDAQ:AMZN)’s presence in the tablet market, he doesn’t see a case for an Amazon phone. He thinks all that will do is increase pressures on the company’s margins. He notes that the retailer will also face big-time competition from Apple Inc. (NASDAQ:AAPL) and Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930).

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However, he said Amazon.com, Inc. (NASDAQ:AMZN) must keep its direct linked to consumers in order to “control the funnel to commerce and content.” He said his checks indicate Amazon is still building support for developers to grow its mobile platform and believes it is at a competitive disadvantage because its share of smart devices is in the low single digits.

Why tablets make more sense than a phone for Amazon

The analyst said tablets are a much more natural fit for Amazon because they tend to lean more towards media consumption compared to smartphones. On the other hand, smartphones require some specialized apps like maps, email, navigation and more. Those apps would be expensive for Amazon to make. He also said these native smartphone apps are “some of the largest and most complex applications” in terms of how much code is needed and the number of server clusters needed to run them.

Sebastian also said the cost of entry into the market and also the complexity of dealing with carriers would be another problem with Amazon.com, Inc. (NASDAQ:AMZN). He predicts that the online retailer could have to invest hundreds of millions of dollars into simply entering the industry. That includes initial development and distribution but doesn’t count continuing research and development.

On the other hand…

The analyst does see some positives in Amazon.com, Inc. (NASDAQ:AMZN) developing a smartphone, but he thinks the already mentioned negatives outweigh these positives. He notes that there are some risks in allowing Apple Inc. (NASDAQ:AAPL) and Google Inc (NASDAQ:GOOG) to continue dominating the smartphone operating system market. For example, the tablet experience on Amazon’s Kindle is diminished because customers have to use the Amazon website to buy Kindle content. Offering a smartphone can also enable Amazon.com, Inc. (NASDAQ:AMZN) to drive more direct relationships and potentially become a bigger player in the payments industry.

 

As for now anyway, he maintains his Outperform rating and $410 per share price target on Amazon.com, Inc. (NASDAQ:AMZN).

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