Markets

Kindle Fire Priced to Move, No Matter How Much Amazon Loses

By Conrad Aenlle

Updated on: September 28, 2011 / 10:16 PM EDT / MoneyWatch

Amazon.com stock (AMZN) rose 2.5 percent Wednesday in an otherwise miserable market after announcing that its Kindle Fire, a sort of iPad Lite, would retail for $199. Amazon probably cannot turn a profit on the Kindle Fire at that price, as one analyst, Gene Munster of Piper Jaffray, figures it, but apparently the mere prospect of winning a significant number of customers who otherwise would have patronized Apple (AAPL) was enough to ignite the buying frenzy.

Using normal-person logic instead of stock-trader logic, it's hard to see what the excitement is about. The cheapest version of the iPad retails for $499, more than twice what Amazon is charging for the comparatively bare-bones Kindle Fire. Munster estimates that Amazon will lose $50 on each sale. If Amazon really saw the Kindle Fire as a rival to the iPad, wouldn't it be priced well below the iPad but high enough to make money on the deal, say $299?

With such discrepant pricing, just how similar are the Kindle Fire and the iPad? They both may look like the handheld computers used by the crew of the Enterprise in "Star Trek: The Next Generation" 20 years ago (or is it 300 years from now?), but the iPad and Kindle Fire seem to do different things and appeal to a different customer base. Even if the goal is to lure potential iPad buyers, if Amazon takes a $50 hit on each Kindle Fire it sells, then what's the best-case scenario, that it sells an extraordinary number of them and runs a loss 50 times as great? If the idea is to run the Kindle Fire as a loss leader and make back the money selling books, well, that's what the original-recipe Kindle is for. Amazon is presenting Kindle Fire as something different.

One Amazon item that is not cheap at all is the stock. It sells for 101 times the company's most recent four quarters of earnings and 71 times analysts' consensus estimate of earnings for the next financial year.

The broad market trades at a very modest 12 times trailing earnings, making Amazon about eight times more expensive. Even Apple, which recently hit a new all-time and is hovering around $400 a share, 40 percent higher than a year ago, trades at less than 16 times trailing earnings.

Just like Amazon, Apple is about to introduce a new version of a popular product, the iPhone 5. Details remain sketchy, but unlike the Kindle Fire, the iPhone 5 probably will fetch a price that makes Apple money.