Summary
- Amazon is considering offering low-cost or free mobile phone service to Prime members, which could attract more subscribers but may impact the company’s margins.
- The company’s core retail business currently has a negative operating margin, and its fluctuating FCF raises concerns about the potential partnership’s synergy.
- Despite a 44% YTD rally, investors should remain neutral on Amazon stock and monitor the profitability of its core business and the translation of Prime member benefits to earnings and FCF.
What Happens
When I saw the Bloomberg news headline in that morning, as an Amazon Prime member, I was excited because I finally got a chance to use my mobile service for free. However, this made me question the synergy it could bring to Amazon’s (NASDAQ:AMZN) shareholders. The company has been recently holding discussions with many wireless carriers regarding the possibility of offering low-cost (like $10 per month) or even completely free nationwide mobile phone service to Prime members. First of all, I believe this move is expected to intensify price competition and pose a significant threat to the top-three carriers, including T-Mobile (TMUS), AT&T (T), and Verizon (VZ). Unsurprisingly, their stocks retreated when the news came out. However, DISH Network Corp. (DISH) finished the day with a 16% rally. Based on this price action, it was obvious that DISH would be the biggest beneficiary from such a potential partnership, particularly given its ongoing struggle to maintain its market share.
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