Amazon Q3 Preview: What We’re Watching Next Week

With the $199 Kindle Fire tablet receiving a warm welcome from all audiences, it could not have ended on a better note for Amazon (NASDAQ:AMZN) just before the company announces its Q3 2011 earnings on 25th October. While the third quarter could see a similar sales surge of 50%+ like in Q2 driven by strong Kindle and e-content sales, ^[1] the challenge for Amazon would be to maintain profitability as it keeps investing heavily for the long term. Amazon competes in the e-commerce and e-content market with other giants such as eBay (NASDAQ:EBAY) and Apple (NASDAQ:AAPL).

See our full analysis and $240 estimate for Amazon

Kindle Hardware and e-Content Should See Strong Momentum

For Amazon, the third quarter largely centered around strengthening its core business of e-content, Kindle hardware and cloud services. The company continued to build further relationships with publishers and content-providers, especially for its Prime Instant Video segment. ^[2] Additionally, initiatives such as the Kindle Cloud Reader are expected to draw further users to the Kindle as a rich source of e-books, while also providing more reach to the company’s cloud-related services. ^[3]

In hindsight, Amazon’s business development in the cloud & e-content space were largely meant to prepare the company for its tablet launch. While the Kindle Fire was launched only in the fourth quarter, the company should still see some significant upsides to its top-line revenue growth for Q3 2011, as most of these initiatives are expected to draw in more consumers with expanded content and attractive price slabs.

Amazon Continues to Squeeze Its Hardware Margins Long Term Growth

With limitations in features – such as the absence of 3G, camera or a microphone – the Kindle Fire might not be in direct competition with the iPad on the hardware side. However, the Kindle Fire comes loaded with Amazon’s cloud and content-based offerings, including a free one-month membership to Amazon Prime as well as the innovative cloud-based web browser – the Amazon Silk. ^[4] Add to this the $199 price tag, and Amazon can ensure that it more than offsets any losses it faces on its hardware through expansion in its content & cloud businesses. In the long-term, all eyes would now be on Q4 2011 sales figures for Amazon’s recently-launched tablet.

We currently have a price estimate of $240 for Amazon’s stock, which is about 5% above the current market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Amazon Q2 2011 Earnings Results [↩]
2. Amazon Announces Digital Video License Agreement with NBCUniversal Domestic TV Distribution [↩]
3. Introducing Kindle Cloud Reader [↩]
4. Is Amazon Silk the Future of Browsers [↩]