Skip to main content

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK (

Trefis

) -- Although not entirely surprising,

Amazon

's

(AMZN)

third-quarter results showed a significant drop in the company's operating margin.

The reduction in operating income reflects the heavy costs Amazon has incurred on its hardware, namely the Kindle Fire tablet which saw an enthusiastic response at its launch in September. Amidst some jitters from investors, we expect Amazon to come out strongly as the Kindle Fire acts as a major platform for Amazon's e-commerce and e-content segments in the coming years, providing stiff competition to

Apple

(AAPL)

(NASDAQ:AAPL) in the mobile content market.

See our full analysis for Amazon's stock

here

Apart from the hardware cost itself, heavy discounting and promotions that came along with the Kindle Fire also had a large role to play in significantly squeezing operating margins, which fell below 1% for the quarter.

By providing free services such as Amazon Prime and Amazon Prime Instant Videos for one month to Kindle Fire users, Amazon is hoping to build major scale through its tablet. This could provide a significant upside to Amazon's share in both e-commerce and e-content spaces.

Additionally, Amazon has invested heavily in expanding its e-content offerings this quarter, such as the licensing agreement between Twentieth Century Fox and PBS. Hefty investments such as these were made to achieve the best possible content offering for the Kindle Fire, and played a part in reducing the company's margins.

Fortunately for Amazon, user adoption of the Kindle Fire has already gathered enough steam, with sales expected to cross 5 million tablets in the holiday season. As the tablet garners popularity and sales volume further, Amazon can be expected to ease out some of the heavy discounts it currently offers. We expect this to lead to some recovery in its operating margins.

We are

revising our price estimate

for Amazon's stock, which is currently around 15% above the current market price. Our estimate has stayed strong relative to the market as we believe the expected sales from merchandise and media should offset the decline in operating margin forecasts. Our price estimate has also varied based on the company's net cash/debt position.

Click

here

to find out how a company's products impact its stock price at Trefis

Like our charts? Embed them in your own posts using the

Trefis Wordpress Plugin

.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.