Amazon could be preparing to release a smartphone in time for next year’s holiday season, according to a research note from Citigroup analyst Mark Mahaney. The company could even make a profit from the sale of the hardware, unlike the Kindle Fire which is reportedly being sold at a loss.

Mahaney has checked supply chains in Asia which led him to conclude that Amazon will indeed develop a smartphone for next year. He has learned that Amazon is working with Foxconn International to develop the phone, the same company that makes Apple’s iPhone. The memo goes on to say that Foxconn likely won’t actually manufacture the phone; that task will be passed on to Hon Hai’s TMS business group.

He thinks the phone will be powered by a Texas Instruments OMAP 4 processor and is likely to use Qualcomm’s dual-mode 6-series baseband chip. The Citigroup analyst feels that Amazon could produce the phone for $150-$170 and could sell it at cost.

Such a revelation isn’t exactly far-fetched given Amazon’s success as of late. The Kindle e-Reader has been a huge hit for the company over the past three years and the Kindle Fire, while still unproven on paper, could become another hit based on its sub-$200 price point and access to Amazon’s vast digital resources.

There was no mention as to what operating system the phone might use. One could suspect a modified version of Android like we see on the Kindle Fire or perhaps Windows Phone could show up on the device, although unlikely. Or, what if Amazon bought WebOS from HP?