Shares of Amazon.com Inc. (AMZN: Charts, News, Offers) dropped 19% in late trading Tuesday after the company reported a sharp drop in their third quarter earnings. The company reported a 73% decline in net income of 14 cents per share or $63 million versus $231 million or 51 cents per share for the third quarter of 2010. The market consensus for third quarter earnings was 24 cents per share. The loss was largely attributed to the company’s increased spending on new products such as the Kindle Fire tablet. The company also stated that it might post a loss for the fourth quarter.
The Kindle Fire tablet, introduced by Amazon CEO Jeff Bezos on September 28th 2011, is a tablet computer version of the company’s Kindle e-book reader. The tablet comes with a seven inch color screen and is capable of streaming movies and TV shows in addition to Kindle e-books.
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Analysts expect the Kindle Fire tablet to be a strong competitor to the Apple Corp. (AAPL: Charts, News, Offers) iPad since it will be priced at just $199 when released on November 15th, 2011. Priced at less than half that of the iPad and mimicking most of its functionality, the Kindle Fire device has been estimated to cost Amazon between $150 and $190 in material costs, with some analysts estimating production costs as high as $250 per unit. Basically, most analysts are predicting that the new device will sell for a loss.
Rather than profit substantially from selling this device, Amazon is clearly banking on making money by selling content such as digital music, books and movies through the tablet, which would also act as an Amazon storefront with access to the Amazon Appstore. Orders for the device are picking up however, with some analysts expecting as many as 4 to 5 million to be sold in the fourth quarter. Nevertheless, the company still expects the fourth quarter to show anywhere from a loss of $200 million to a profit of $250 million, while analysts were expecting a profit of $512.7 million for the fourth quarter. Hence Tuesday’s big decline.
Earlier this month, the company’s stock hit a record high of $246.71. Nevertheless, trading on Tuesday had the stock fall 4.4% during regular trading hours followed by a sharp decline to as low as $184.59 in late trading after the New York close. At current prices, Amazon stock is still trading at 119 times earnings, compared to Apple’s PE which is 14.
Amazon has also been losing money on rising shipping costs, in part due to an increase in customers who use Amazon’s Prime program. The program allows customers to pay $79 a year for unlimited two day shipping. Shipping fees generated $360 million in revenue in the third quarter, compared to shipping expenses of $918 million – a considerable shortfall.
Despite many analysts’ dire forecasts for Amazon stock, the company retains a well established customer base from its first generation Kindles, which have already provided the company with ample third party sales as more and more people opt for electronic books versus paperbacks. Only time will tell how much Amazon’s revenues will improve with a larger number of Kindles sold in the fourth quarter.
Other News About AMZN
Amazon’s Tablet Leads to Its Store
Kindle Fire helps give Amazon more business.
Amazon’s Kindle Fire Tablet to Sell at $200
New device competes with Apple iPad at less than half price.
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Apple and Android Dominate Mobile Advertising
Results of a quarterly study from Millennial Media.
IBM’s Rometty Breaks Ground as 100-Year-Old Company’s First Female Leader
Big Blue appoints first female chief executive officer ever.
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Article copyrighted by Jay Hawk. Content published with author's permission.
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