Amazon and Apple: Two Tablet Makers, Two Drastically Different Fourth Quarters

The Amazon Fire is selling really, really well.

So well, in fact, that the tablet market is often characterized as being a two-horse race between the tricked-out Amazon e-reader and Apple’s iPad.

But when it comes down to the numbers, the two companies couldn’t be more different, like comparing Apples to oranges.

Tomorrow, Amazon is expected to report a giant fourth quarter, but it’s guaranteed not to look anything like Apple’s monstrous results reported last week for the same period.

Here’s one data point: For the holiday period, Apple’s gross margin was an impressive 44.7 percent, up from 38.5 percent a year earlier. Meanwhile, analysts are estimating that Amazon’s operating margin will fall to 1.3 percent from 3.6 percent last year.

The specifications of the two tablets can be compared side by side, but a completely different vocabulary is needed to speak intelligently about the two businesses. Simply put, Apple is a hardware maker and Amazon is a retailer.

One has very high margins and the other doesn’t, resulting in two drastically different financial outcomes today. But over time, the idea is for that to change.

Rather than making money from hardware sales, Amazon’s approach to the Fire is to generate incremental sales from other goods and services on the device. Some analysts feel that, over time, that play can create a reliable and recurring revenue stream — and ultimately higher margins.

Tomorrow, Amazon is expected to report sales of $18.3 billion in the fourth quarter, up more than 40 percent from the same period in 2010, according to FactSet Research. Q4 earnings are expected to fall notably to 17 cents a share from 91 cents a year ago.

While revenue growth is impressive, the company’s profitability is being weighed down by losses from the $199 Kindle (which is not quite a break-even proposition), the construction of more warehouses across the globe (17 were added in 2011 for a total of 69) and other investments in infrastructure, like its cloud-computing services and media services, like video, music and e-books.

In contrast, Apple has a rich markup on its iDevices and doesn’t have much of the same overhead as Amazon.

Still, the number of consumers Amazon touches in just one quarter is staggering, and it continues to take share from brick and mortar retailers.

As J.P. Morgan analyst Douglas Anmuth points out in a report, e-commerce grew about 15 percent in Q4 in the U.S. due to strong holiday sales, but he expects Amazon’s growth rate to more than double that to 47 percent year over year.

Anmuth is also bullish that while the fourth quarter could represent a “low point for margins,” Amazon could start seeing an uptick in margin as soon as the first quarter, now that a number of services and some key infrastructure are set in place.

However, don’t expect much insight tomorrow into the company’s long-range plans. The Seattle-based company is typically short on details during its earnings release and call.

If it follows standard protocol, it could provide an update on warehouses being built next year, number of employees and other infrastructure investments, but will likely dodge answers about how many Kindles it shipped during the quarter, or how much Kindle Fire owners are purchasing on the devices.

For now, we’ll have to settle for analyst estimates.

On Sunday evening, Stifel Nicolaus analyst Jordan Rohan raised his estimate for fourth-quarter Fire sales to six million units from five million.

While only on the market for a limited time, that’s still a lot less than Apple, which sold 15.43 million iPads, up 111 percent year over year.

Amazon’s stock dropped 1.65 percent, or $3.22, today to close at $192.15 a share.

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