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On Tuesday morning, Amazon (AMZN) released a lightning deal for the base Kindle Fire model; while the Kindle Fire usually retails for $159, the company made a limited number available for $129. The deal opened at 10 A.M. PT, and was gone within three hours. What does this temporary discount mean for the Kindle Fire? There are three potential explanations that seem plausible to me. First, Amazon may have aimed to create some buzz around the Kindle Fire, to take some attention back from Apple's (AAPL) prolific launch of the iPad mini. Second, Amazon could have dropped the price as a test of demand at the new price point. If this is the case, the company could be considering a permanent price drop. Third, the price drop may have been a simple tactic to clear unwanted inventory.

Regardless of the exact rationale for the "lightning deal", this episode suggests that Kindle Fire sales are not meeting expectations. None of the likely scenarios look particularly good for Amazon. First, if Amazon needed to drop the Kindle Fire price as a marketing technique, it confirms what many already suspected: the new iPad mini is stealing Amazon's thunder. In early September, Amazon unveiled four new Kindle Fire models to great fanfare, including an updated version of the original 7" Kindle Fire; a new 7" Kindle Fire HD with a better processor, more storage, a camera, and an HD screen; an 8.9" version of the Kindle Fire HD; and an 8.9" HD model including an LTE modem. For a brief period of time, this generated a lot of positive publicity for Amazon.

However, Apple finally unveiled the long-awaited iPad mini in late October. In the first weekend of sales, Apple sold 3 million iPads, of which 2-2.5 million were likely iPad minis. With Black Friday only a week away, Apple is still estimating 2 week shipping times for the iPad mini, suggesting that demand far outstrips supply at this point. Apple is an even higher-profile company than Amazon, and so its recent product onslaught has diverted a lot of attention away from the Kindle Fire lineup. On top of that, Microsoft's (MSFT) new Surface tablet recently went on sale, and Microsoft is putting a lot of money into marketing it. A number of other device manufacturers have released their own tablets running the new Windows RT OS as well. In addition, Google (GOOG) re-entered the fray late last month by doubling the storage for each of its Nexus 7 tablets, while introducing a new Nexus 10 tablet and Nexus 4 smartphone. In short, Amazon's September product release event is so far in the past that it has nearly been forgotten. That's particularly alarming given that the 8.9" Kindle Fire tablets haven't even begun to ship yet. If this Kindle Fire price drop was meant to boost the profile of Amazon's tablet lineup, the effect will have worn off before Black Friday. It's important to remember that the Kindle Fire faced essentially zero competition in the sub-$200 market last holiday season (RIM's (RIMM) discounted Playbook was a partial exception). This year, the Nexus 7 is a strong competitor, and the iPad mini has a much better chance of convincing budget-minded consumers to trade up. With this level of competition, Amazon might have to resort to even more desperate maneuvers to catalyze sales.

If the $129 promotion was a test for a move to permanently drop the Kindle Fire price, this would be evidence that Amazon sees a more permanent pricing problem with the Kindle Fire. The $199 Kindle Fire HD has generally received very good reviews, whereas the $159 model (which offers a lower display resolution, slower processor, no camera, and less storage) has received fairly lukewarm coverage. With only $40 separating the two, Amazon may have found that the $159 Kindle Fire was not priced low enough to expand the product lineup's market penetration. Amazon may therefore be considering a permanent price drop for the Kindle Fire. However, dropping the price to $129 means that Amazon would be losing money upfront on each device once again. Moreover, at $129 the Kindle Fire could begin to cannibalize Kindle Fire HD sales. This in turn could undermine Jeff Bezos's vision of making money when people use Amazon's devices; people who buy the lower-quality Kindle Fire are likely to enjoy it less, use it less often and replace it sooner. Less usage means lower content sales, and selling content is the key to Amazon turning a profit.

Lastly, and most simply, it could be that Amazon found itself with too many Kindle Fires on its hands and therefore dropped the price in order to clear inventory. While I think this is the least likely scenario, if true this is very bleak news, given that the price cut came 10 days before the biggest shopping weekend of the year. The sales pace would have to be very low indeed, to justify "clearance" activities before the holiday season has even begun.

The significance of a shortfall in Kindle Fire sales is that analysts have been projecting unrealistic future growth rates for Amazon. As relatively high-priced and high volume products, the various Kindle Fire models (and associated content sales) make up an increasingly important proportion of Amazon's revenue. While many Amazon bears have decried the company's better than 100X forward earnings multiple, bulls can justify the high price so long as continued rapid growth seems assured. A reduction in the Kindle Fire lineup's contribution to revenue growth could exacerbate the decline in Amazon's growth rate that I expect. When the market finally lowers its growth estimates for Amazon, the stock could see severe multiple contraction. I therefore continue to rate Amazon as a sell/short.

Source: Amazon's $129 Kindle Deal Means Q4 Could Be Ugly

Additional disclosure: I am long AAPL and RIMM.