Amazon (NASDAQ:AMZN) is bringing the heat to the tablet market. The company is projected to sell 5 million Kindle Fire tablets before the end of the year — impressive considering the device will only have been on sale for a month and a half.
However, that number looks more remarkable when you put it in context with the entire tablet market. While Apple (NASDAQ:AAPL) sold 11 million tablets during this year’s third quarter, all other tablet makers combined sold just 1.2 million devices between January and October — meaning the Kindle Fire might single-handedly have created a competitive tablet market.
Still, big time sales or not, Amazon is taking a hit on every Kindle Fire sold. The device sells for $199 but costs $201.70 to build — and that loss doesn’t count any licensing or royalties Amazon pays on the tablet’s technology. Nor does it consider losses taken on the company’s free shipping offers. Amazon might burn a hole in its pockets with the Kindle Fire even if it’s a success.
And now’s not the time for Amazon to be burning cash, either. In the most recent quarter, AMZN net sales came to $10.88 billion, good for year-over-year growth of 44%. However, various costs including Kindle Fire development and manufacturing — as well as new licensing deals with Disney (NYSE:DIS) and News Corp. (NASDAQ:NWS) for streaming video rights — drove net income down. Way down. Net income was down 73% from last year at just $63 million, or 14 cents per share, which missed Wall Street expectations by a dime per share. Guidance for the fourth quarter wasn’t promising either, with a wide income forecast of between $250 million and a loss of $200 million.
AMZN shares tanked from a mid-October high above $240 to $195 by month’s end. As of Tuesday — despite a positive Kindle Fire debut week, rumors of a new Amazon smartphone and massive holiday sales projections — Amazon was trading just above $192. That’s still above its 52-week low of $160, but AMZN is heading for its support level of just below $186. All signs say sell and sell now.
Before moving those shares, though, it’s important to think about Amazon’s positioning going into 2012. Those millions of Kindle Fires represent more than just strong brand reinforcement, but increased sales for literally all of Amazon’s operations. That device is a handheld portal for Amazon’s core online retail business. Each Kindle Fire comes with a free trial to the Amazon Prime premium subscription service, which, for $79 per year, gives users access to streaming video, an e-book lending library and discount shipping.
It’s estimated that Amazon’s total annual revenue grows 1.5% for every 1 million new Amazon Prime subscribers. Assuming the company sells 5 million Kindle Fires and just 20% of those new customers become paying Prime subscribers, that’s a significant bump in revenue. Even though net income projections for the fourth quarter don’t inspire confidence, sales projections should: Amazon expects Q4 sales of between $16.5 billion and $18.7 billion, representing YOY growth between 27% and 44%, respectively.
That uptick in revenue should fuel the company’s ambitions for a while to come. Digitimes reported Tuesday that the company already is preparing two new models of Kindle Fire — 8.9-inch and 10.1-inch versions with enhanced capabilities over the current 7-inch model — for release in 2012.
Amazon is evolving in a powerful way. It is transforming from a retailer that relies on other company’s products, be they phones or PCs, to reach customers into one that reaches customers directly through its own devices.
The Fire is delivering on the promise Amazon’s Kindle business showed when it started in 2007. Amazon already leads online retail and is spending big to place a literal storefront in consumers’ hands under the guise of entertainment. It’s the reverse of what Apple has done with its devices, selling desirable technology first as a gateway to retail. With Kindle Fire on track to sell big in the near and long term, $192 ultimately might turn out to be a bargain for a piece of Amazon.
As of this writing, Anthony John Agnello did not hold a position in any of the aforementioned stocks. Follow him on Twitter at @ajohnagnello and become a fan of InvestorPlace on Facebook.
