Amazon: Strong third quarter on tap, but Kindle armada to hurt margins

Analysts are upbeat about Amazon's fourth quarter, which could be stellar. All eyes are on the Kindle Fire.

Amazon's third quarter is expected to be strong as sales should surge with new Kindles and a better-than-expected e-commerce outlook. However, those $199 Kindle Fire tablets have analysts worrying about profit margins in the fourth quarter and beyond.

Wall Street is expecting Amazon to report third quarter earnings of 24 cents a share on revenue of $10.93 billion.

The optimism around Amazon's third quarter revolves around e-commerce strength, three days of new inexpensive Kindle sales and international gains. Third quarter profit margins, however, will be hampered by investments in distribution and data centers.

Also: Cracking Open the Amazon Kindle 2011 | Amazon Kindle Fire: The math behind a subsidized tabletAmazon's Kindle Fire: The ultimate integration, services channel

Among the key items to watch:

E-commerce growth. Jefferies analyst Youssef Squali said that Amazon's North American sales should be up 45 percent from a year ago. International revenue in the third quarter should surge 49 percent from a year ago.

Kindle Fire guidance. Amazon isn't likely to detail much about the Kindle Fire, but Squali is expecting 3 million to 4 million units to ship by year end with 12 million Kindle e-readers shipping in the fourth quarter.

Profit margins. Amazon's third quarter gross margins are expected to be 23.10 percent and then fall to 20.33 percent in the fourth quarter. McAdams Wright analyst Dan Geiman said:

Significant investments in fulfillment and technology – supporting the ongoing conversion from physical to digital as well as the expansion of Amazon’s cloud offerings – in addition to increased marketing spend, will weigh on margins and earnings.

The fourth quarter outlook. Stifel Nicolaus analyst Jordan Rohan wrote in a research report:

In our view, this year's fourth quarter has the ability to be a really special one. Increased price sensitivity among online consumers plays into Amazon's strength. Our best pre-quarter prognostication is that Amazon will guide investors to expect 4Q revenues to $18.1 billion at the midpoint, representing a 40%+ organic growth rate, with the high-end of the range at $18.5 billion.

Digital advertising. Amazon is also expected to push more into advertising in 2012. Analysts will be looking for any detail on that topic.

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