Report: Amazon may produce 2 smartphones

Like the Kindle, the devices would likely be geared towards driving sales of other products, while being sold at a net loss.

By TheStreet.com Staff Oct 7, 2013 10:07AM

Amazon.com logo © Spencer Platt/Getty ImagesBy Bret KenwellTheStreet logo


NEW YORK (TheStreet) -- While the rumor has not been confirmed, I'm not so sure that more devices would be a good idea for Amazon (AMZN).


While reading TheStreet's senior technology correspondent Gary Krakow's piece regarding the possible new products -- yes, plural -- does sound rather interesting, you have to question the company's fundamentals a bit.


Reportedly, Amazon will produce a high-end and a low-end smartphone.


I'll let you read Krakow's article to get a better idea of the two, because that's not what I'm focusing on. Instead, I'm more concerned about the company's inability to produce a profit and am wondering how long investors are willing to wait for it to happen.


Don't get me wrong: I like Amazon. The stock has been a strong momentum play and despite its inflated price-to-earnings ratio, refuses to let pessimism get in the way. But at some point, you have to be hesitant of its ability to ever grow sizable profits. At least, profits that will allow the company to grow into its lofty valuation.


But since the company's fiscal second quarter of 2012, it has lost money in two quarters and had a gain of one cent per share in another quarter. Essentially, three of the past five quarters were profitless, with estimates expecting another loss in the upcoming quarter.


Revenue growth has been strong though, increasing from $24.5 billion in 2009 to $61.1 billion in 2012, nearly a 150% increase. But on the other hand, operating expenses have ballooned from $23.4 billion in 2009 to $60.4 billion in 2012, a similar 158% jump.


By now, we all know that Amazon is willing to lose money on its devices to gain market share and thus, drive sales of its other services, such as Amazon Prime, and products from its site.

This strategy is fine, but to what extent? For 99% of other stocks, this action wouldn't be tolerated for more than a quarter or two.


Amazon is clearly exempt. Simply put, it's not like the other 99% of stocks. Its share price is disconnected from the fundamentals, much like Tesla Motors (TSLA) and Netflix (NFLX).


Sentiment for Amazon has been, and remains, quite bullish. Despite it seeming like more and more investors have started questioning CEO Jeff Bezos' plan, the stock continues to appreciate.


The gains are probably too much, as it's hard to see how Amazon is ever going to grow into a valuation that's this high, especially at the rate it continues increasing.


I'm not bearish on Amazon, but I'm definitely skeptical. I think any responsible investor should be. I was leery when the company said it would produce the Kindle at a loss, just to gain market share with the hope that it would substantially drive future sales.


While the rumored devices aren't being confirmed or denied, it wouldn't be illogical to assume these smartphones would have a similar plan to the Kindle -- not something that I'm overly thrilled about

.

As time goes on, I'm sure we'll learn more, just as I'm sure the stock will continue to rise.


At the time of publication the author had no position in any of the stocks mentioned.


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