Amazon sinks profits into Kindle Fire

Amazon.com shocked investors with lower profit and a far weaker-than-expected outlook for the crucial Christmas season as it spent heavily on its new Kindle Fire.

Amazon forecast fourth-quarter revenue of $16.34 billion to $18.65 billion, which would mean 27% to 44% growth from a year earlier.

In the third quarter, sales grew 44%, less than the 51% gain in the second quarter. Amazon said its third-quarter net income was $63 million versus $231 million a year earlier. Revenue was $10.88 billion, up 44% from the third quarter of 2010, it added.

The company unveiled its new Kindle Fire tablet in late September and many analysts think it is being sold close to the cost of making it, or even at a loss.

“The revenue is a little light, but margin is where the biggest variance is from Wall Street’s expectations,” said Scot Wingo, chief executive of ChannelAdvisor, a software company that helps merchants increase online sales. “This is largely due to Amazon’s investment in the Kindle Fire.”

Amazon is also investing in video content and other publishing deals to support the device, while spending on datacenters for its cloud computing business and fulfillment for its online retail operations.

Wall Street has accepted such spending because Amazon has proved in the past that it can generate higher growth from such investments. However, analysts have been on edge about Amazon’s third-quarter results and fourth-quarter forecasts because of the recent increase in expenditures.

The company also said it could report a $200 million operating loss to a $250 million operating profit in the holiday quarter as it spends on the Fire and other initiatives.

Amazon’s fourth-quarter forecast implies a profit margin of “effectively zero”, Youssef Squali, an analyst at Jefferies & Co, noted during a conference call with the company.

Amazon chief financial officer Tom Szkutak also said Amazon is increasing production of the Kindle Fire by “a few million units”, citing strong demand.