Success of Amazon’s Kindle Fire Kills Profits, Sinks Stock

| Analysis

The success of Amazon’s Kindle Fire tablet is catching up with the company before the device has even shipped. The company announced on Tuesday that profits would take a hit during the December quarter, likely because of the Fire, and investors punished the stock, sending AMZN down more than 12%, erasing more than US$13 billion in valuation in the process.

Gives a new meaning to

The Kindle Fire

AMZN ended the day at $ 198.40, down $28.75 (-12.66%), on heavy volume of 24.1 million shares trading hands, three times the previous daily average.

The online retailing giant recorded sales that were up 44% year-over-year for the September quarter at $10.88 billion, up from $7.56 billion. In addition, the company guided December quarter sales to an impressive $16.45 billion to $18.65 billion, a range that would put it up between 27% and 44% year over year.

Those are impressive numbers, even for Amazon. The problem that spooked investors is that the company guided December profits to between a loss of $200 million and a profit of $250 million. Wall Street had been estimating a profit of $512.7 million.

Earnings for the September quarter also missed estimates. Amazon turned in profits of $63 million, down from $231 million in the year ago quarter. That’s $0.14 per share, where Wall Street had expected $0.24 per share.

Several analysts believe it is the Kindle Fire that is putting the hurt on profits. Amazon announced the 7” Android tablet in September at $199, and the device is scheduled to ship on November 15th. The company had reportedly pre-sold as many as 250,000 of the devices as of October 5th, and some analysts are projecting that Amazon will sell as many as 5 million of the devices during the full December quarter.

“Competing with Apple isn’t easy,” Colin Sebastian, an analyst at Robert W. Baird & Co, told Bloomberg. “It comes at a cost, but the traditional media business they have would wilt on the vine without Amazon making this transition to digital.”

That will make it the hands down #2 tablet in the market defined by the iPad, but IHS iSupply believes Amazon is losing $10 on each and every Kindle Fire sold due to the cost of materials on the device. Many believe that Amazon hopes to make that money back on the sale of digital media for the device and increased sales of physical goods through the great shopping experience the device is likely to offer.

If not, perhaps the company can make up the loss on volume, as the old saw goes.

Another factor in Wednesday’s stock action is that Amazon hit an all-time high earlier in October as Kindle Fire mania had everyone as stoked as the little engine that could. AMZN hit $246.71 on October 14th, and many investors could have seen Tuesday’s news as a great excuse to take some profits off the table.

As it is, AMZN still trades at a P/E of 119.61. By comparison, AAPL trades at a P/E of 14.37, and that’s not taking out the more than $80 per share in cash that Apple holds.

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Comments

Bosco (Brad Hutchings)

To be fair, Bryan, AMZN currently has a P/E of over 100, which is basically insane. Apple’s is about 15, which is pretty sane.

mhikl

I don’t get it. You might make a great product, at least reviewers who haven’t seen such yet are saying so, based upon specs. Then you sell it for cheap, practically giving it away. Then you admit you’re not going to make much but will be selling bundles during the holiday season. Then investors crap on you.

Now Apple sells bundles of its iProducts. It doesn’t give them away, practically for free, but squeezes its customers till their eyes cross. It is making oodles of money. Then investors cap on you.

At this point, the only advice I can offer Amazon is to hope the Kindle Fire doesn?t sell so they can tell their investors they won?t? be baking too many of them after all and therefore won?t be losing lots of money like they thought.  So, now people can buy their stock some more.

Maybe Amazon could sell iPads along side their Kindle Fire and then they would might make up enough revenue that cancels the Kindle?s losses or even manages a smidgeon of profit.

Somehow I don?t think that will work.

furbies

Will the Kindle Fire be “root"able ? Is that the right expression ?

(Will enterprising nerds be able to load Google’s Android OS onto it ?)
I’m just wondering out loud because if nerds can hack it, that’ll hurt Amazon’s ecosystem sales ?

webjprgm

Will the Kindle Fire be ?root"able

Most likely yes, since they’ve been able to hack any other device (iPhone, PS3, anything).  So as long as the hardware is compatible with stock Android OS, then yes.

I?m just wondering out loud because if nerds can hack it, that?ll hurt Amazon?s ecosystem sales ?

The experience won’t be as nice as an iPad, because the Fire is lesser hardware.  So the number of people installing normal Android will likely be small.  Though, a jailbroken iPhone still can buy App Store apps, but a rooted Fire might not be able to buy Amazon content ... unless the nerds fix that too, then it’s alright for Amazon.

Bryan Chaffin

I corrected the ship date on the Fire, which will ship on November 15th, not December 15th.

Also, i bet folks find a way to root the Fire, and that many of them will find their way into the hands of people wanting to install OSes other than the Fire’s forked version of Android.

At the same time, however, Amazon will have many, many hard core customers adopt these things and be delighted with them. I don’t doubt Amazon’s ability to sell more content and stuff through the device.  I do wonder, however, if the company with such incredibly tiny margins can sell enough to make up the hardware loss.  We’ll see!

Bosco (Brad Hutchings)

Amazon has stated that they’re not going to do anything (e.g. locked boot loader) to get in the way of mod’ers. But they don’t have an SD card slot, so it’s not as slam dunk simple like B&N Nook Color.

The developer page indicates that they are shipping Android 2.3, with full APIs that Android developers expect, but of course, no Google apps APIs or Android Market APIs.

And BTW, millions of these will be rooted or just used for specific tasks like living room jukebox, bedside alarm clock, etc. Price and size make it ideal for a lot of set it up and leave it purposes. I think critics and outsiders are being a little bit too literal in assessing what Amazon is doing and how they profit from this device.

Lee Dronick

Yesterday I read an article somewhere, sorry I don’t remember where, that the reason for the profit loss was that Amazon put a lot of money into infrastructure improvements. This to support their Fire Sale and the content with servers and such.

Speaking of infrastructure improvements. Our local Barnes & Noble bookstore is undergoing renovations to become more Nook centric. Literally, pun not intended, the Nook section is taking a large central area of the store. It looks like their music and video section, which was quite large, is gone for good.

mhikl

Market shenanigans are run amok in a world where greed is king. And this king hath no clothes. Sit tight on your throne and don?t flush. Buy low sell high still reigns in this squandered kingdom. Mind you, it may be a crap shootout at Amazon, so I?ll continue to store my plunder at Apple.

Fire Sale. Now that is truly clever, Sir Lee. Also, no pun intended but surly noted.

rich

its all about content. they will make up the loss in book sales movie music prime memberships ETC. thier selling you a device to buy more stuff form them. amazon was never a hardware company even with the orginal kindle they were doing just fine with reguler books and only came out with the kindle to be a vessal for more book sales in e-format. they had success with selling music videos and apps for other companies devices so naturaly they would come up with one of thier own.

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