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Amazon.com Inc. (Nasdaq: AMZN): Growth Phase Pinches Profits, but Investors Should Ride it Out

Internet retailer Amazon.com Inc. (Nasdaq: AMZN) reported soaring revenue and limited profits today (Tuesday) - but investors shouldn't be discouraged by the low earnings as the company invests in future growth.

Amazon.com reported net income of $177 million, or 38 cents a share, compared to net income of $416 million, or 91 cents a share, for the same period the previous year - a 58% plunge. Revenue jumped to $17.4 billion, a 34% rise from the $12.95 billion in 2010's fourth quarter.

While revenue fell slightly short of Wall Street's expectations, earnings were more than double the predicted 17 cents a share. Amazon.com had given fourth-quarter guidance with a revenue range of $16.5 billion to $18.7 billion.

Amazon.com revenue got a healthy boost from sales of Kindle Fire, the tablet and e-reader running Goolge Inc.'s (Nasdaq: GOOG) Android software. Total sales of the Kindle Fire and other e-reader devices increased 177% in the nine-week 2011 holiday season compared to the same period in 2010. The company reported that Kindle Fire is the No. 1 selling product available on Amazon.com since it was introduced in November.

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Amazon Kindle Tablet Will Plump Revenue and Disrupt Market

A rumored Amazon Inc. (Nasdaq: AMZN) Kindle Tablet will deliver billions of dollars in fresh revenue next year.

In addition to its hardware sales, the tablet will provide a quick and convenient way for Amazon to capture a bigger chunk of the digital media market and allow customers to buy any of its millions of offerings from almost anywhere.

The 7-inch tablet is expected to appear within the next month or so and cost just $250. Such a low price from a trusted brand like Amazon will disrupt the entire tablet market.

"A proprietary tablet would allow Amazon to widen itscompetitive moat, improve consumer experience and benefit from the rapid growth in mobile usage," Jefferies & Co.'s (NYSE: JEF) Youssef Squali wrote in a report.

Although analysts expect Amazon to make little profit from the tablet itself, its potential for selling more of its digital wares such as e-books, movies, music and Google Inc. (Nasdaq: GOOG) Android apps is boundless.

The Kindle e-reader shows how hardware can drive media sales. It has helped Amazon capture 90% of the e-book market.

The Kindle e-reader will account for 9.9% of Amazon's total revenue next year, just five years after its debut, according to Citigroup Inc. (NYSE: C) analyst Mark Mahaney. Mahaney estimates about half of that revenue, $6.1 billion, will be from sales of the device, with the other half from e-books.

An Amazon Kindle Tablet will open up multiple digital avenues of growth.

Take online video sales, for example. Amazon has just 4.2% of that market, well behind the 65.48% share of Apple Inc.'s (Nasdaq: AAPL) iTunes Store.

In terms of additional revenue, the Kindle tablet could quickly rival that of the e-reader.

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