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Can the Kindle Fire Ignite Amazon's Earnings?

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Don't expect eye-popping short-term results from Amazon after the close.

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Dozens of S&P 500 (SPY) companies are reporting earnings today, but none are getting as much attention as Amazon (AMZN).

Here's the skinny on what Wall Street is expecting from Amazon this afternoon:
  • Analysts polled by FactSet expect Amazon to earn just $0.17 per share, down from $0.91 a share from a year ago.
  • Sales are forecasted to jump 40% year over year to $18.3 billion.
  • The crowd-sourced outlook on Estimize.com is more bullish, looking forward to $0.48 per share.
  • Amazon's stock is still south of 200, but up more than 10% over last month.
The introduction of the Kindle Fire tablet last quarter is certainly the main attraction of today's release. Amazon released the Fire halfway through the quarter in mid-November 2011. Analysts recently revised up their estimates of Kindle Fire sales to 6 million. Amazon tends not to report exact numbers for Kindle products. The Fire is seen as a sort of a poor man's iPad, but judging from Apple's (AAPL) recent performance, 6 million tablets is nothing. For the Kindle, more so than the iPad, the device itself isn't the moneymaker (see below).

In recent quarters, Amazon's margins have been paper thin. Analysts expect operating margins to fall to 1.3%, down from 3.6% one year earlier. With revenue growing at a clip, this should be seen as a good thing. (Read: Why Amazon's Low Margins Deserve Praise) Amazon is wreaking havoc on its competitors, not just in online retail, but also brick-and-mortar retail. Right now, Amazon is sacrificing profit for revenues and market share.

A lot of investors are turned off by Amazon's stratospheric valuation. Currently, Amazon price to earnings ratio is at 101. That makes Amazon about 7 times more expensive than Apple. This shows that the market is willing to be patient with letting Jeff Bezos take over the world.

Speaking of low margins, one caveat to the Kindle Fire story is that the device itself doesn't make any money for Amazon. According to experts, Amazon actually sells the tablet for slightly less than the production cost, to say nothing of marketing and shipping costs. Kindle Fire sales should be regarded as an investment, like Gap (GPS) opening a new store. That means that customers, by becoming Kindle owners, are paying to become loyal customers of Amazon. It's a bit like the business model that we see with inkjet printers: cheap printer, expensive ink. Pretty much mandatory customer loyalty.

The Kindle Fire also comes with one free month of Amazon Prime, which is easy to get addicted to. Prime is an insanely successful loyalty program. Members pay $79 in exchange for one year of subsidized shipping, video streaming, and the opportunity to borrow e-books. So even if the Fire sales don't translate into dazzling profits right away, within a few months, it should pay off. Analysts are looking for higher earnings from Amazon--about $0.42 per share the first quarter of 2012.

If Amazon does surprise us today with some higher-than-expected earnings, tech sector ETFs could get a nice boost. The losers will be any brick-and-mortar operation that Amazon is eager to conquer, especially Barnes and Noble (BKS), Best Buy (BBY), and Walmart (WMT).

Twitter: @vincent_trivett
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No positions in stocks mentioned.
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