Will the Cheap Kindle Fire Burn Amazon or Ignite Profits?

×

Will the Cheap Kindle Fire Burn Amazon or Ignite Profits?This hasn't been a good week for Amazon.com (AMZN) shareholders.

On Wednesday, the leading online retailer's stock took a nearly 13% hit after Amazon posted disappointing quarterly results, and it didn't gain much back Thursday after the shock wore off.

Folks are still flocking to Amazon.com in record numbers, with net sales soaring 44% to $10.88 billion during the last three months. Top-line growth has rarely been a problem for this dot-com speedster. The real concern here is the suddenly congested path down the income statement to a shrinking bottom line.

Taking Heat on the Kindle Fire

Selling Kindles at freefalling prices has been murder on Amazon's already meager markups.

Investors have accepted this. It's the price that Amazon must pay if it wants to make sure that it keeps up with Apple (AAPL) in tech gadgetry and keeps Barnes & Noble's (BKS) Nook as a distant second in the e-reader market. However, analysts figured that Amazon would only earn half as much as it did during last year's third quarter. Instead, Amazon's profitability fell by 73%.

That's bad, but things may be about to get worse.

The Holidays are on Fire

The Kindle Fire hits the market next month, and the $199 tablet is a "hot" seller.

Amazon CEO Jeff Bezos pointed out this week that there's an unexpectedly large pre-order demand for the seven-inch touchscreen gadget ahead of its Nov. 18 release.

"We're increasing capacity and building millions more than we'd already planned," he says.

This would normally be the kind of news that would send board rooms into a frenzy of high-fives, but it's not as if Amazon is turning much of a profit on the entry-level tablets.

Bezos hasn't divulged the margins on the Kindle Fire, and he probably never will. However, there's more than anecdotal evidence pointing to the Fire as a profitability killer.

Amazon's guidance for the fourth quarter is sobering. The Web-based retailer sees net sales soaring between 27% and 44% higher. However, Amazon's operating profit guidance ranges from a loss of $200 million to a gain of $250 million. In other words, there's a real possibility that the resiliently profitable Amazon posts a quarterly loss during the potent holiday quarter.

The Bright Side of Playing with Fire

Investors dumping shares of Amazon this week may want to take a longer-term view of the online pioneer.

There's a reason why Amazon is willing to sell Kindles for as little as $79 and Kindle Fire tablets for $199. The compelling price points will grow Amazon's installed base by millions of new users this quarter, and where will those buyers turn for the digital books -- and in Fire's case, digital music and movies, too?

Amazon started out as a media retailer. It began by selling books, quickly adding CDs, DVDs, and video games. It now offers all of that media in the form of digital downloads when available. It's a win-win solution. Shoppers don't need to wait, and Amazon doesn't have to fret over warehousing and shipping costs.

Millions of Kindle Fire tablets sold this holiday season will result in millions, tens of millions, and perhaps even hundreds of millions of high-margin digital transactions in the future.

The Kindle Fire may be stinging shareholders now, but they'll be grateful they were put through the short-term pain for the long-term gain in the future.

Longtime Motley Fool contributor Rick Munarriz does not own shares in any stocks in this article. The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple and Amazon.com. Motley Fool newsletter services have recommended creating a bull call spread position in Apple.




Increase your money and finance knowledge from home

Forex for Beginners

Learn about trading currencies and foreign exchange transactions

View Course »

What are Penny Stocks

The lucrative and dangerous world of penny stocks.

View Course »

Add a Comment

*0 / 3000 Character Maximum

10 Comments

Filter by:
daballofire

My wife wants one so it must be really stupid :-)

October 31 2011 at 1:55 PM Report abuse rate up rate down Reply
Gumby

Amazon wants to be bigger than WalMart which is still ten times as big. Profits can wait.

October 30 2011 at 5:22 PM Report abuse rate up rate down Reply
Ono

Will the Cheap Kindle Fire Burn Amazon or Ignite Profits?

Wrong question but very provoking.

Will consumers benefit from Kindel/Amazon battle?

That's what I want to know.

October 28 2011 at 6:38 PM Report abuse rate up rate down Reply
Bob Simmons

I know many, many people that were going to get the ipad for thier kids for Christmas and now they are turning to the Fire,Eexcellent gaming and inexpensive extended warranty. they save money and can afford other items.

October 28 2011 at 6:15 PM Report abuse rate up rate down Reply
James

I still like the old fashioned book.

October 28 2011 at 6:13 PM Report abuse rate up rate down Reply
charpist5

I already have a BB Playbook, no need of a Kindle Fire. What I take exception to is the now really cheap Kindle eReader. I paid a fortune for my first kindle, and a slightly lower fortune for my Kindle 3. So I kind of resent the $79 Kindle, as all I use mine for is reading, and have no interest in reading "in color." Otherwise, I use amazon.com quite a bit, and don't plan to stop. I just don't plan to buy another new Kindle of any sort any time soon.....

October 28 2011 at 4:36 PM Report abuse rate up rate down Reply
BHarrison2

It is a business risks that they took . . . now we will see how it pans out . . . that is "capitalism", isn't it?

October 28 2011 at 3:20 PM Report abuse +1 rate up rate down Reply
BLONDIE & GRUMPY

Isn't this strategy a little bit like Gillette's; give the razor away for Free and charge like hell for the blades??? Very Smart in my Opinion...

October 28 2011 at 2:28 PM Report abuse rate up rate down Reply
jonut3

The Motley Fool's FREE report is not free. It wants to sell you some subscriptions.
after you reading through the article then it comes yhe sale pitch. What a deceptive practice.

October 28 2011 at 12:34 PM Report abuse +1 rate up rate down Reply
1 reply to jonut3's comment
BHarrison2

That is just marketing . . . do you think that others should work for "free"? Do YOU work for "free" for your emplyer? I think not.

October 28 2011 at 3:23 PM Report abuse rate up rate down Reply