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

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 "Kindle Fire"

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.