The New Kindle Fire and Amazon’s Amazing Business Model

Amazon unveiled some new tablets today and damn they’re cheap:

The new 7 inch Kindle Fire HD will cost $199 and will be available next week. The slightly larger version will cost $299 and ship on November 20th and yet another version, with 4G LTE wireless will cost $499 with a 49.99 per year data plan. “A year ago we were content to have the best tablet at this price,” Bezos said. “This year we want to have the best tablet at any price.”

By contrast, the cheapest LTE-enabled iPad costs $629. The LTE Fire is an inferior product along a number of dimensions to the LTE iPad, but there’s no getting around the fact that this is a tremendous bargain. And, indeed, the Amazon ecosystem is full of tremendous bargains. That’s in part because the company’s run well, but it’s largely accounted for by the fact that Amazon’s profit margins are thin. And good for them. Thin margins are a huge win for consumers.

But what’s weird about this is that Amazon doesn’t seem to pay a penalty in financial markets for these thin margins. Their stock has a price/earnings ratio of 309. A more typical number for a mature firm would be Apple’s ~15. Investors’ willingness to assume that Amazon will have amazing earnings growth in the future lets it get away with relatively modest profits in the present. That, in turn, lets it offer great deals to consumers. And as long as you have no actual skin in the game, it’s basically a big party. But will Amazon’s thin margins really let it grow so fast as to justify that lofty valuation? Maybe! But it seems risky to me. And it’s noteworthy that the company’s Amazon competes with—traditional retailers, now hardware makers—are not assessed so generously and that itself becomes a factor in the competition.