The late Apple CEO Steve Jobs unveils the iPad (left) and the "new kid on the block' Amazon CEO Jeff Bezos unveils the Kindle Fire tablet. Can the lower-priced ($199) and "It's not an iPad, but it's not bad" Kindle Fire win against the premium-priced ($499-$699) and better performing Apple iPad? A Citi analyst says YES.
Hot Kindle Fire Sales
How many Kindle Fires will Amazon sell next year?
Enough to claim a decent chunk of the tablet market, says Citi analyst Mark Mahaney.
Mahaney estimates that Amazon will sell 12 million Fires in 2012 to wrest a 15 percent share of the tablet market from Apple. If he’s right, the Fire will end up generating about $3.2 billion in revenue, or about 5 percent of Amazon’s total.
Mahaney says.
“The path is clear. With an aggressive pricing strategy, an unmatched content cross-sell opportunity, a market-smart form factor, and probable product improvements — Amazon can own a substantial segment of the tablet market.”
Amazon Misses Q3 2011 Earnings Estimates
After market close Tuesday, November 23, Amazon CFO Thomas J. Szkutak held a earnings call with analysts and media, and reported that earnings for Q3 2011 were $63 million, or 14 cents a share, compared to $231 million, or 51 cents a share, for the same period the year prior, a drop of 73% in earnings.
Amazon's revenues rose 44 percent to $10.88 billion, but analysts had been expecting earnings of 24 cents a share on revenue of $10.9 billion, according to consensus estimates from Thomson Reuters.
Most of the decline in earnings was due to higher fulfillment, marketing, technology and content and G&A combined was $2.29 billion or 21.1% of sales, up approximately 290 basis points ( 2.9%) or $335 million from the nine months ending September 30, 2010. Here are the three expenses responsible for most of the decrease in earnings for the quarter.
- Fulfillment - $1.09 billion or 10% of revenue compared with 8.7% the prior quarter.
- Tech and Content - $694 million or 6.4% of revenue compared with 5.1% the prior quarter.
- Marketing - $360 million or 3.3% of revenue compared with 3.1% the prior quarter.
The above three line items were up a combined $309 million.
Due to the poor Q3 earnings report, Amazon (NASDAQ:AMZN) stock dropped in price from $237.60 on October 24 to $198.40 on October 26.
Amazon Prospects For Q4 2011
Amazon is looking forward to Q4, which includes the holiday shopping seasing and launch of the Kindle Fire. Amazon forecasts sales of between $16.45 billion and $18.65 billion for Q4 2011. Operating income is expected to range from between a profit of $250 million or a loss of $200 million.
COMMENTARY: I agree with Mr. Mahoney optimistic assessment of Kindle Fire unit sales in 2012.
Jeff Bezos is competing practically unopposed in the low-end market for tablets which didn't really exist until now. Amazon's lone competitor in the low-end market is Barnes & Noble's Nook tablet (priced at $249), but the B&N announced their new tablet more than a month after Amazon unveiled the Kindle Fire, and its higher priced may hurt the book retailer's sales. I think there is a huge opportunity for the Kindle Fire to thrive and dominate the low-end segment of the market, because Apple competes nearly unopposed in the high-end segment of the tablet market with a 90% share of the tablet market.
Apple appeals primarily to early adopters, Apple evangelists, more affluent and older Gen-X and young Boomers (35 to 49 years). Amazon will be competing in the low-end where consumers are younger and less affluent (GenY or Millennials and high school and college students), Kindle eReader users upgrading to the Kindle Fire, and some of the GenX, young Boomers and retirees who have not purchased a tablet yet.
Jeff Bezos has demonstrated that there is a demand for a fully-featured tablet priced at $199. On October 25, 2011, Jeff Bezos said that the company is seeing huge demand for the Kindle eReader and underestimated demand for the Kindle Fire. Bezos said.
“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 preorders, we’re increasing capacity and building millions more than we’d already planned.”
Quanta Computer produces the Kindle Fire, but pre-orders were so brisk that Amazon has contracted with Foxconn Electronics, the giant Taiwanese contract manufacturer with plants in China that produces the iPad and iPhone. Foxconn will begin production beginning in Q1 2012.
According to DigiTimes, Amazon is preparing to release the Kindle Fire in a new 8.9-inch and 10.1-inch screen sizes. Production of the 8.9-inch Kindle Fire is set for production in Spring 2012, and the first shipments will begin in June 2012.
DigiTimes said the 8.9 inch displays would be coming from suppliers Chunghwa Picture Tubes and LG Displays. DigiTimes also names Samsung as an additional supplier of the 8.9-inch screens and say the larger screen sizes are due to the suppliers’ promotion of those 8.9-inch touchscreen panels.
Supply chain sources also said Amazon was trying to sidestep direct competition with tablet manufacturers releasing products in the 9.7-inch to 10.1-inch range. Such devices would include Samsung’s Galaxy Tab 10.1, HP’s Touchpads, Skytex’s Windows tablets and Apple’s iPad.
Amazon's Q3 2011 earnings report is cause for concern, but Amazon's revenues are growing so rapidly, that the company has had to make higher than anticipated investment in fulfillment, R&D and content, and marketing expenses to keep pace, and lay the foundation for higher revenues in Q4 due to Kindle Fire sales and for even higher shipments of the Kindle Fire in 2012 as noted above.
The other concern is just how much Amazon will lose on sales of the Kindle Fire. By some estimates, the Kindle Fire costs $203.00 to produce. This would mean that it's losing a minimum of $4.00 per unit sold. Some estimate the number could be $15.00 per unit sold. If Amazon sells 4 million Kindle Fire's as expected, it will generate an additional $8 billion in revenues in 2011. It could also lose $16 million before shipping costs, which is free unless you ship overnight.
Courtesy of an article dated November 22, 2011 appearing in All Things Digital and an article dated October 25, 2011 appearing in All Things Digital and an article dated October 25, 2011 appearing in Seeking Alpha
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