How Ugly Will Amazon.com's Earnings Be?

Sep.25.13 | About: Amazon.com, Inc. (AMZN)

Amazon.com (NASDAQ:AMZN) just announced the new line of Kindle Fire tablets, dubbed the HDX. As I predicted, these won't be shipping on Q3 2013, so their sales will have to be recorded on Q4 2013 leading further credence to a Q3 2013 revenue miss. This is implied in the shipping dates, set for Oct 18 (7 inch version) and Nov 7 (other versions).

But the announcement of these tablets begs another question. Just how ugly will Amazon.com's earnings be? The consensus stands at a $0.09 loss per share. But there is a sign that actual earnings might come in significantly worse than that.

The sign started with the launch of the new Kindle Paperwhite e-reader. This happened on September 5. And it continued today with the new line of Kindle Fire tablets.

Basically, these devices were announced without some kind of bash to go with them. Some kind of public event. Nobody would expect Apple (NASDAQ:AAPL) to just launch a new iPhone or iPad without gathering hundreds of journalists somewhere to do it. Yet, Amazon.com, which used to do the exact same thing with its launches, this time skipped on the bash. To save what, a couple of million dollars even while losing a part of the media impact?

There is something wrong here. This is well against the typical story where Amazon.com doesn't have earnings because it "presently doesn't want to." This is aggressive, visible, cost-cutting. It's penny pinching. And there needs to be a motive for it.

I'd estimate that the motive is simple. The earnings are bad. Real bad.

Previous launches

The original Kindle was announced on September 28, 2011. The stock ran up into the announcement and dropped around 10% in the following weeks. But more importantly:

  • This was two years ago, Amazon.com was supposed to sell the tablet at cost and then make a killing on content. The reality was that earnings have done nothing but head down since then, proving this fairy tale to be fake;
  • And also importantly, Amazon.com threw a bash to launch this tablet.

The Kindle Fire HD was launched on September 6, 2012. The stock ran into the announcement but lost more than 10% in the following weeks. This launch was made in an hangar - for it, too, Amazon.com threw a bash. Not so today, not for the Kindle Fire HDX nor for the Kindle Paperwhite. This makes me think that Amazon.com is cutting every possible cost imaginable from the company, right down to company product presentations, and yet it's still likely to show a loss.

The new Mayday function

Amazon.com's new "Mayday" feature is being billed as innovative. It consists of an on-screen button that customers can use to call up an Amazon.com representative to help them with their tablet. I too believe this feature will result in more sales for Amazon.

But there's a problem Amazon.com hasn't foreseen. This feature will attract essentially people that feel they will need help. Thus, Amazon.com will again be exposed to adverse selection, a phenomenon it's no stranger to.

This, on an "at-cost" tablet will probably quickly make it a "loss tablet." Investors ought to be worried as even without this effect, Amazon.com's staff numbers have already been outpacing revenues for quite a while.

Conclusion

The way the launches of the Kindle Paperwhite and Kindle Fire HDX went speaks of extreme cost cutting even while Amazon.com isn't even profitable. Amazon.com went to great lengths not to spend money on these launches. Such cost cutting is probably driven by ugly earnings that Amazon.com is well aware of and which will be reported in October.

Disclosure: I am short AMZN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.