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Amazon Dives On Q3 EPS Miss, Outlook On Kindle Fire Spending

Amazon (NASDAQ:AMZN - News) shares dived late Tuesday after the e-tail king missed third-quarter earnings views by a wide margin due to a spending surge for new fulfillment centers, e-readers and other expenses. Sales also came in modestly below views, and the fourth-quarter outlook was weak.

The Seattle-based online seller of books, electronics and more earned 14 cents a share, down 73% from the year-ago quarter and 10 cents below the average estimate of analysts polled by Thomson Reuters. Sales surged 44% to $10.88 billion, below views for $10.93 billion.

Amazon shares fell 12% in after-hours trading. That follows a 4% regular-session loss.

"We're investing in all our businesses," Amazon CFO Tom Szkutak said in a post-earnings conference call with analysts. He said the costs included spending on 17 new fulfillment centers, new Kindle models and outlays for retailing systems, infrastructure and Amazon Web services.

Amazon's cost of sales surged 43.9% in Q3. Total operating expenses rose by 48.1%.

Sales rose 44% in North America and in the rest of the world.

Global media sales grew 24%.

Operating income plunged 70.5% to $79 million, from $268 million in Q3 2010.

Operating margins fell to a scant 0.7% vs. 2% in Q2 2010 and 3.5% a year earlier.

Amazon expects sales in the holiday-impacted Q4 to range from $16.45 billion to $18.65 billion, or to grow between 27% and 44% vs. the fourth quarter of 2010. Analysts were expecting $18.10 billion.

Operating income is expected to weigh in between a net loss of $200 million and a gain of $250 million, or between a 142% decline and a 47% drop vs. Q4 2010.

Analysts said Amazon is performing well despite the earnings miss and weak outlook, which wasn't entirely unexpected.

"In terms of sales execution there isn't another company that's hitting on all cylinders like Amazon," said Standard & Poor's equity analyst Michael Souers.

Fire Singes Margins, Rivals

The e-tail king, which introduced a new Kindle Fire tablet computer in late September, also says orders for the $199 device are going well. CEO Jeff Bezos said in a statement that the company's "building millions more" Kindle Fires than it had planned.

The Kindle Fire is priced far below other tablets running on Google (NASDAQ:GOOG - News) Android software. The clear market leader, the Apple (NASDAQ:AAPL - News) iPad, sells for $499-$699.

ChannelAdvisor, a software maker that helps third-party retailers sell on Amazon, says Q3 same-store sales for its customers who sell on Amazon soared 72% from a year earlier.

"We think the buzz around Kindle Fire drove a lot of traffic to Amazon's site late in the third quarter," said ChannelAdvisor CEO Scot Wingo.

S&P's Souers estimates that company sales will soar 44% in 2011, after 2010's 40% gain. But he's concerned by what he says is the stock's excessively high valuation. He adds that Amazon is staying the course with its strategy of driving long-term growth by sacrificing short-term profit via aggressive price cuts on Fire and its latest slew of Kindle e-readers. But he sees inevitable pressure on margins.

At the same time, the S&P equity analyst sees potential revenue growth in the 30-day free trial of Amazon Prime that's tacked on to each Kindle Fire purchase. The $79 annual membership service includes streaming video and free two-day shipping for e-commerce purchases.

Souers says the one-month trial nudges Fire owners who don't currently use Prime to become regular subscribers who buy videos and consumer goods on Amazon.

JPMorgan analyst Douglas Anmuth said in an alert to investors issued this week that there are signs of "strong pre-order demand" for Kindle Fire, which starts shipping on Nov. 15. Checks with multiple supply chain vendors show that Fire production has risen sharply recently, with 4.5 million to 5 million units on track to be produced in Q4.

Anmuth expects Amazon to sell 5 million Kindle Fire units in Q4. Consultant Strategy Analytics predicts that Amazon will sell more than 15 million by 2013.

Citigroup analyst Mark Mahaney said in a report issued earlier this month that Amazon's share of online retail sales in the U.S., which now stands at 12%, could reach 20% in the next 10 years.

But Mahaney says Amazon faces a bump from a possible imposition of uniform state sales taxes next year and a potential "Media Hole" in its digital media offerings and sales outside of e-books.