Amazon's profit drops 73%, Shares sink 9%

Faith Merino · October 25, 2011 · Short URL:

Analyst surprised Q4 revenue forecasts aren't 'robust'; Kindle Fire to blame?

(Update: To reflect Amazon's share price during Wednesday morning trading.)

Amazon posted its third quarter earnings results late Tuesday, and it's all smooth sailing for the e-commerce giant: sales were up 44% to $10.88 billion, the Kindle saw its largest order day ever on September 28, and profit tanked 73%.  Wait, what?

Yes.  Profits dropped off 73% to $63 million from $231 million a year ago.  The culprit: the Kindle Fire.  To be more specific, Amazon’s heavy investment in its new tablet, which retails for $199—a full $300 cheaper than the cheapest iPad—has leached the company dry (sort of).

Shares of Amazon (AMZN) sank 9% to $206.12, after being down 12%, in after-hours trading Tuesday.

The good news is that this would presumably mean that the problem is temporary.  Sales are still going strong, so assuming that trend continues, Amazon should be able to recoup its losses in no time.  The company also expects to make up for losses through revenue from digital music, books, and movies.

The bad news is that Amazon has lowered its fourth quarter guidance.  While analysts had projected an operating profit of $512.7 million in the fourth quarter, Amazon estimates an operating loss of some $200 million—which would translate to a staggering 142% decline.

“We don’t view these results as thesis-changing,” wrote Citi analyst Mark Mahaney in a research note.  “AMZN’s spending seems clearly elective/discretionary/offensive against very large market opportunities. But we are surprised that the Q4 revenue guide isn’t more robust. Macro? Are they not including Fire shipments?...”

Amazon also predicted that fourth quarter revenue will be somewhere between $16.45 billion and $18.65 billion, while analysts were expecting at least $18.15 billion.

And yet…Kindle sales are strong.

"September 28th was the biggest order day ever for Kindle, even bigger than previous holiday peak days - we introduced Kindle Fire for $199, Kindle Touch 3G for $149, Kindle Touch for $99, and our all new Kindle for only $79," said Jeff Bezos in a statement. "In the three weeks since launch, orders for electronic ink Kindles are double the previous launch. And based on what we're seeing with Kindle Fire pre-orders, we're increasing capacity and building millions more than we'd already planned."

The bizarre third quarter results follow similarly bizarre third quarter results from Apple earlier this month, when the company stunned the business/technology world by missing analyst expectations on iPhone sales. 


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