Will the Cheap Kindle Fire Burn Amazon or Ignite Profits?

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.

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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.

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