The Company

The News

Christmas came early for

Amazon.com

The upbeat assessment from Citigroup's Mark Mahaney came on the heels of solid earnings from Amazon, which on July 23 reported second-quarter profits of 37 cents a share, ahead of Wall Street estimates of 26 cents. The rally in the Seattle-headquartered company's stock helped push the Nasdaq Composite 2% higher on the session.

According to Mahaney, the $350 Kindle electronic reader "could be one of the top 'gadget' gifts this holiday season." He raised sales estimates for the device to $1 billion by 2010, up from an earlier range of $400 million to $750 million, or as much as 4% of Amazon's projected revenue.

Apple] iPod of the book world," the Citi analyst wrote.

Amazon's total revenue for 2008 is expected to rise 34% to $19.84 billion, and grow an additional 25% in 2009 to $24.75 billion, according to analysts polled by Thomson Reuters.

The Analysis

Investors may be thrilled that Amazon could have this year's Cabbage Patch Kid for grown-ups, but other analysts aren't quite convinced the Kindle is enough to keep the fires burning.

The death of print has been augured ever since Marconi's wireless made its first crackly transmissions, but books and paper persist, and the Kindle isn't going to supplant them any time soon. Consumers were already accustomed to listening to music on headphones the iPod just made it cooler and less cumbersome.

"Kindle's a great product, but we don't think the addressable market is anywhere near the size of the iPod market," says American Technology Research analyst Tim Boyd. "We think it will ultimately appeal to a much smaller slice of the market than the iPod."

The emphasis on one product particularly one that's getting headlines because of what Mahaney called "a dearth of 'gadget' gifts in the fourth quarter except the 3G iPhone" probably isn't enough to justify a double-digit stock price increase.

Dominic LaCava, an analyst at Canaccord Adams, says that shouldn't take away from the Kindle's positive impact.

"I think it's still a pretty small story it's a nice story, but it's a little early for it to be driving the stock," he says.

Amazon fans should instead look to the company's growth rate, which was three times the rest of the online retail sector last quarter, he says.

"They're just stealing market share," LaCava says. "Over half of all people who shop online go to Amazon first."

The Bottom Line

Things get noticed in August that might be swept aside in a busier market, and the Kindle headlines may represent a momentary blip. Or, more likely, investors want a reason to like this stock at a time when many Internet names are struggling on reduced consumer-discretionary spending.

Citi's Mahaney conceded some possibility for over-optimism in his report, noting that "there is always the possibility of Amazon not being able to convert shipments into sales and simply 'stuffing the channel.' But the channel in this case would have to be Amazon's own warehouses," and its inventory control has improved recently.

But the Kindle, no matter how well it sells, isn't really a breakthrough product, says American Technology Research's Boyd, who also notes that the recent rise of the dollar has wiped out $1 billion in European sales, so even if the rosiest projections are reached those sales remain vulnerable to an increasingly international company.

"The market's been in a frame of mind to take Amazon up on any excuse," he says. "These assumptions about the Kindle are more bullish than people anticipated."

Also See:
Street Hits eBay Hard Over Soft Guidance
Leaderless Market Calls for Wait-and-See Approach
Internet ETF Makes Debut in Bad Market