Amazon reports its fourth quarter earnings on Tuesday and the main attraction will be sales of the Kindle Fire as well as its e-commerce effect for e-books, music, video and apps.
Just a few weeks ago, worries about Amazon’s profit margins were everywhere. Oh no, Amazon was selling the Kindle Fire at a loss. Oh no, Amazon is going to stumble.
Since the Kindle Fire launch, however, the worrywarts have calmed down a bit. These profit margin worries have died down so much that they are expecting some potential upside to the fourth quarter.
Wall Street is looking for Amazon to report earnings of 19 cents a share on sales of $18.2 billion.
Youssef Squali, an analyst at Jefferies, said that he sees “potential upside from Kindle.” Squali estimated that Amazon built 5 million to 6 million Kindle Fire units with 4 million sold. E-reader shipments overall are expected to be 12 million units. Squali also estimates that Amazon will build 4 million Fire units in the first quarter.
Gene Munster, an analyst at Piper Jaffray, said that hardware sales may account for 15 percent of Amazon’s revenue.
The Fire is likely to complement strong e-commerce sales that indicate that Amazon grabbed more wallet share from consumers.
Although the Fire is the main attraction, analysts said that profit margin worries will continue. After all, Amazon is investing in distribution centers, video and Amazon Web Services.
Other analysts such as Morgan Stanley’s Scott Devitt argue that these investments will either start to pay off or be scaled down a bit. In either case, Devitt said margins could improve. Devitt said in a research note:
Margin concerns are legitimate, but we think the headwind is cyclical, not structural: Amazon.com’s investments in video content, AWS, Kindle Fire development/unit sales and product category expansion/market share gains have had a detrimental effect on adjusted operating margin. While Amazon.com has gone through investment cycles in the past, none have been as prolonged or as deep as the current one (CQ4:11 will mark 7 consecutive quarters). We believe the likelihood for an inflection point increases with each quarter. Either the investments will work and sales will respond or Amazon.com will moderate investment spending – either way, margins will likely improve.
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