The Future of Amazon's (AMZN) Cloud

Shares of e-commerce giant Amazon (AMZN: Charts, News) have risen over 25% since the beginning of the year, outperforming the market and silencing bears who consistently claim that the company's trailing P/E of 178 is unsustainable. Yet Amazon has remained a staple stock of growth investors, and its $199 tablet, the Kindle Fire, has proved that it can disrupt markets just as well as Apple's (AAPL: Charts, News) iPad.

The Kindle Fire tablet, sold at a loss in order to hook new customers into its e-commerce ecosystem of e-books, movies, games and retail goods, claimed over half of the Android tablet market last year by using a forked Android system that cuts Google (GOOG: Charts, News) and its Play Store out of the picture. Daily Chart
Now, new rumors have surfaced regarding Amazon's highly anticipated follow-up to the Kindle Fire. Amazon's new platform, GameCircle, notably resembles Apple's social-gaming network Game Center, which is available on iOS devices. GameCircle improves on Game Center's system by allowing gamers to directly sync save games over Amazon's cloud service, which also stores music, video and e-books for Amazon customers. GameCircle includes an option to "switch between Kindle Fire devices", which has led industry watchers to speculate that Amazon is preparing to launch several new variants of its flagship tablet. Early reports claim that Amazon is preparing a larger Kindle Fire tablet to compete with the iPad, as well as a new version of its 7-inch model. ABI Research analyst Aapo Markkanen went one step further to suggest that an Amazon smartphone could succeed the next series of Kindle Fire devices, as early as the first quarter of 2013. Amazon is also reportedly studying the viability of a TV or a media hub device. Each of these devices could be equipped with the same Amazon forked Android storefront which is found on the Kindle Fire, which guarantee that it will be the first stop for all its users. "That's one of the key advantages of the cloud, storing content that can migrate from device to device," Markkanen noted. "It's a natural extension to add more devices to the mix." Amazon currently offers up to 5 GB of free storage to each customer for storing music and media. These files can be streamed to the Kindle Fire and other mobile devices using Amazon's mobile apps. The Amazon Prime program, which offers free two-day shipping on select items, free streaming movies and TV shows, and access to the Kindle e-book lending library, has proved to be a popular option among Kindle Fire owners, and through its mobile apps, it could reach even more Android and iOS users. Mike Morgan, a smartphone analyst at ABI Research, also noted that due to Amazon's massive cloud network, it could subsidize the cost of upcoming mobile devices and even bypass carriers via advertising in its cloud network, an advantage that handset manufacturers could only dream of. In its first quarter, reported at the end of April, Amazon reported a 35% drop in earnings per share, from 44 cents to 28 cents per share. However, its revenue soared 34% from $9.86 billion to $13.18 billion. Analysts expected earnings of 7 cents per share on $12.9 billion in revenue. Amazon warned that although it would post revenue between $12 to $13.4 billion for the current quarter, it would post a large decline in operating profit due to heavy investments in the Kindle Fire and new shipping centers. Investors cheered this decision, since Amazon has been reluctant over its 15-year history to spend heavily on initiatives that impact margins and erode quarterly profits. The stock still trades at 85 times forward earnings, and has a 5-year PEG ratio of 5.4. These fundamentals seem to signify that the stock is overvalued and growth could be sluggish on the horizon. However, buying interest in the stock remains strong, and a new flurry of cloud-based devices could turn the market on its head. Other News About AMZN Amazon's Smartphone Becomes A Reality Is Amazon about to launch an all-out assault on Apple? Amazon Home-Brew Phone Would Be Tough, Says Baird Some analysts remain skeptical regarding the prospects of an Amazon Phone. Other Stocks in the News Wall Street Gains on JPMorgan, China Data JPMorgan's earnings prompt a modest rally. Barclays Admitted False Libor Reports to Fed in '08 Barclays remains under siege for its role in Libor manipulation. Copyright 2012 by, Inc. InvestorGuide has no control over the sites we link to, is not affiliated with these sites, and cannot take responsibility for their quality or suitability. The news, analysis, commentary and profile information is not meant to be comprehensive, and the data provided is not guaranteed to be accurate. WebFinance Inc., the publisher of this newsletter, is not a registered investment advisor or a broker/dealer. This is not a stock recommendation newsletter but rather a source for investment ideas, and we encourage you to fully research any company before considering investing. The opinions expressed herein are those of the author and do not necessarily represent the views of nor are they endorsed by WebFinance Inc. No employee of WebFinance has owned or currently owns any shares in the company described above. The above is neither an offer nor solicitation to buy or sell any securities. The trading of securities may not be suitable for all potential readers of this newsletter, and the purchase of stocks mentioned in this newsletter may result in the loss of some or all of any investment made. We recommend that you consult a stockbroker or financial advisor before buying or selling securities or making investment decisions. We are not responsible for claims made by advertisers and sponsors. Anyone who makes decisions based on what they read here does so at their own risk and cannot hold WebFinance Inc. (DBA, Inc.) or its employees responsible.

Published on Jul 16, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

Copyrighted 2020. Content published with author's permission.

Posted in ...