Original URL: http://www.theregister.co.uk/2011/10/26/amazon_shares_slashed_profits_drop/

Amazon’s shares slashed as profits drop 73%

Sales OK, but costs through the roof

By Iain Thomson

Posted in Financial News, 26th October 2011 00:06 GMT

Amazon’s share price dropped sharply after it reported overall profits have fallen 73 per cent year on year.

The third quarter of the year is traditionally the slowest for retailers, but the company reported that net sales rose 44 per cent from this time last year. However, the company is selling its Kindle hardware at a loss, and has also invested heavily in backend infrastructure this quarter, in particular new warehouses (and air conditioners El Reg hopes.)

Other areas of investment for the company include setting up new Amazon Web Services (AWS) features, such as its virtual private cloud systems and the hardened AWS GovCloud service designed to win federal business. Presumably a fair amount of funds have also been spent strengthening its EC2 backbone after this year’s outages.

However, it is the company’s policy on the Kindle that has Wall Street most worried. Amazon is selling the Kindle Fire at $199, massively undercutting Apple’s iPad. As HP demonstrated with the TouchPad fiasco, there is strong consumer demand for low-cost tablets, but whether Amazon can make enough back in media sales to offset the low purchase price remains to be seen.

"In the three weeks since launch, orders for electronic ink Kindles are double the previous launch,” said Amazon’s CEO Jeff Bezos in a statement. “And based on what we're seeing with Kindle Fire pre-orders, we're increasing capacity and building millions more than we'd already planned."

Looking ahead, the company estimated its operating income next quarter would range between a loss of $200 million and a profit of $250 million, both well below last year’s figures. The fourth quarter is traditionally the strongest for retailers like Amazon, but the company is lowballing estimates of the quarter in advance, suggesting expected profits will not be good.