Why Amazon's Spending Spree Should Continue With Rumored Acquisition

Analysts and investors alike are split over rumors of Amazon.com's (Nasdaq: AMZN  ) proposed acquisition of Texas Instruments'  (Nasdaq: TXN  ) mobile processor unit. At first glance, the deal makes sense: After all, Amazon is already using Texas Instruments' processors in its successful Kindle tablet products. And it's no secret Amazon has considered entering the smartphone market, so what's the problem?

It's the latter concern -- a possible foray into smartphones and a head-on collision with Apple (Nasdaq: AAPL  ) iPhones and Google's (Nasdaq: GOOG  ) Android OS and its Motorola Mobility smartphone sets -- that's left some insiders scratching their heads. Texas Instruments shareholders, on the other hand, love the idea, having boosted the stock price up around 3% at Monday's open. Amazon? Not so much.

The deal
Should it come to pass, and at this point no one from either camp has confirmed the rumors, Amazon would purchase what has been a steadily declining business unit for Texas Instruments. Its mobile computing division generated just $342 million in Q2 2012, just over 10% of Texas Instrument's $3.35 billion in total revenues for the period.

Amazon CEO Jeff Bezos' gushing at last month's Kindle Fire rollout that its new and improved product is "40% faster than previous versions" takes on a whole new twist now. The word is that Amazon and Texas Instrument's are in advanced discussions, which would indicate talks have been going on for some time -- possibly since last month's Kindle announcement, allowing Bezos time to start laying some PR groundwork, waxing poetic about the speed and efficiency of the processors used in its Kindles?

The concerns
In addition to what is already a crowded mobile phone and computing field, concerns regarding an acquisition include adding to Amazon's current spending spree. With plans to open 18 new warehouses by the end of 2012, and continuing to invest in cloud computing and other tech-related expenses as it ramps up for the all-important holiday season, expenses have been off the charts.

Amazon's operating income in Q2 of 2012 was almost half the same period in 2011, and that was on nearly $3 billion in additional revenues quarter-vs.-quarter. The culprit? Total operating expenses grew by virtually the same $3 billion. The decrease in operating income wasn't all due to reinvesting in key business lines, foreign exchange rates, and expenses associated with the Kiva Systems acquisition played a part, too. But Amazon's open checkbook is driving most of its bottom-line declines in financial results of late.

So, now what?
Taking on a mobile processor computing unit doesn't have to equate to a commitment to manufacturing smartphones. Google was out peddling its Android OS to phone manufacturers long before the Motorola Mobility acquisition. Why not a slower entry into the hypercompetitive smartphone market, using Texas Instruments chips in other manufacturers' phones?

Then there are the numerous tablet entries hitting the streets, all in need of mobile processors. Google's Nexus is likely to be followed in Q1 of 2013 by a Nokia (NYSE: NOK  ) tablet, piggybacking on its Lumia phone alternative. Using Amazon-produced processors to continue growing its Kindle line of tablet computing options, expanding on its current 22 % domestic market share, is also a viable revenue-enhancing alternative.

And let's not forget cloud computing -- widely recognized as an exploding market, with Amazon already smack-dab in the middle of it. Secure, mobile computing alternatives using cloud technologies have a huge upside, another area of considerable growth potential for mobile-computing data processor manufacturers.

Along with its explosive growth in cloud revenues and the margins that go along with it, Amazon is pumping money into its Amazon Prime video service both here and abroad. Web Services (part of which includes cloud computing) continues to be a key revenue driver, and, oh yeah, it's still the leading online retailer in the world -- and growing.

You can forget traditional financial measures evaluating Amazon as a potential investment opportunity; it's playing by its own set of rules. And it can, too. Don't sell Bezos and company short, if Amazon decides to play in the data processor game; methinks the company will do it right. And with zero long-term debt and just shy of $5 billion in cash, Amazon could make it happen with nary a hiccup.

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Tim Brugger has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, and Google. Motley Fool newsletter services recommend Amazon.com, Apple, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On October 16, 2012, at 1:55 AM, SimchaStein wrote:

    On the surface, this looks like high risk for small cost savings - an e-tailer taking on chip development.

    But, take a look at Calxeda, who just closed a $55 funding round to build servers for the cloud based on ARM. The whole idea is to reduce the capex and the opex (electricity, cooling, and floorspace) with ARM Cloud servers. Now that could be a big deal for AMZN, and a big threat to INTC.

    Hey, I'm just guessing here - Would love to hear others chime in.

  • Report this Comment On October 16, 2012, at 10:12 AM, dragonmaster123 wrote:

    They will just lose more money.The chip business is incredibly competitive. Why do you think ti would sell the line to them?ti is tired of the huge capital investment for just 10% of their revenue. Amzn is incredibly overvalued. They never make much money. They may be the king of online retailing, but that means the king of low margin. the pe should be 20 not 300. Now that best buy will price match, they probably won't make much money in q 4. the cloud? Big unknown as far as profit. Web hosting is highly competitive with Oracle starting to target the cloud too as well as apple.

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