Kindle Economics: Five Reasons to Buy Amazon

“You have a secret, but you don't want to tell me” – Malcolm Crowe

Amazon (AMZN) is doing a head fake. The company wants us to concentrate on the Kindle hardware while in fact it is cleverly moving into the book publishing and social networking spaces. Taking a page out of the Apple (AAPL) playbook, I predict the Kindle will be to Amazon as the iPod and iPhone are to Apple. It is clear paper-based newspapers are soon becoming a thing of the past. What has not been said or referenced often enough is that books and magazines are soon to follow. Moreover, the shift to platforms like the Kindle will transform book and magazine publishing forever. Due to the disruptive force of the Kindle (and assuming Amazon executes well), there are 5 reasons why Amazon should be high on your list of companies to buy for the long term.

Reason #1 Kindle Socialization

Although not publicly stated, Amazon is probably working on socializing the Kindle device through its software as a service (SaaS) platform Whispersync or another yet to be announced SaaS application. The SaaS application should allow readers of books, magazines and blogs to mark-up, comment and share that information with the Kindle community or a book club. Imagine a group of students working through a school textbook collaboratively but miles apart yet the mark-ups show up on their Kindle’s automatically. Want to know what your friends are reading? Just review on the Kindle and order.

Reason # 2 Kindle Revolutionizes Author – Reader Relationship

No longer will there be a one way relationship between book or magazine authors and readers. Authors will have the ability to further monetize their work while readers will have the ability to interact with the author. In fact, authors will be able to add and update links or passages on the Kindle automatically to reflect new work that has been written. They can also add personal audio clips or notes as they receive feedback from the Kindle community. Readers will have the ability to comment on passages, complete surveys or give reviews Twitter style after each chapter. That direct real time feedback will allow authors to further understand their customer the reader.

Reason #3 Kindle and Whispersync as Platform

Amazon has recently opened up its platform to the iPhone and will increasingly do so as the platform matures. Soon, Amazon will open up its platform to hardware and software providers in order to allow applications to enhance the reading experience. I can envision an application provider selling a networked competitive version of Sudoku or Crosswords on the platform. I can also envision a company adding an easy method of micropayment for these platform applications, or a one-click button that will authorize impulse purchases for Kindle related applications, for example, paying $.25 for a chapter in a book or listening to a motivational speech by Stephen Covey.

Reason #4 Kindle Will Change the Way Books Are Written

Today, book authors understand that once the book is printed on paper it forever remains a static publication. In order to update it, the author either reprints a new edition or writes a sequel. With the Kindle, the author will have the ability to update a completed book or charge the reader a subscription to read a book being created chapter by chapter which monetizes the book faster. What if JK Rowling wrote the Harry Potter series as a progression of chapters instead of separate books? Conceivably, she could take the series in different directions depending on what reading channel you wanted to follow. For example, the creation of Harry Potter subplot branches that develop into new stories or parallel chapters.

Reason #5 Kindle Monetization

An experiment by the author of Worldwide Rave recently offered Kindle readers a free download of the book if they ordered it within the five days of publication. The offer set off a flurry of downloads and positive buzz that gave the author immense exposure with little cost (due to the nature of digital downloads versus paper). Because of the Kindle, the book has been a top seller at Amazon (#362 on the Kindle since last checked).

I expect content providers will bundle their digital subscriptions and sell them preloaded on the Kindle while offering a $150 discount. I also foresee advertisers will subsidize content by offering you a free download of your favorite magazine article if you take a quick survey about their product. Other authors of a similar genre will be given the opportunity to advertise on the Kindle so that if you are reading Stephen King, you may get a recommendation to read Dean Koontz. Since Whispersync and Kindle understand what other content is on the Kindle (unlike a computer), the ability to mine that data and present reading recommendations is unlimited.

Amazon Is a Long Term Buy

Citigroup analyst Mark Mahaney estimated that Amazon will sell 378,000 units this year, and Kindle will be a $1.1 billion business that accounts for 4% of Amazon’s revenue in 2009. McAdams Wright Ragen analyst Tim Bueneman hinted after a meeting with Amazon executives; "there are already several new, improved versions of the Kindle in the works." The company is banking its future on the device and there’s little standing it its way. Sure, Sony (SNE) is making a run, but Sony is licensing content from Google (GOOG) while Amazon owns the store and the SaaS channel.

Amazon is expected to earn $1.48 billion in 2009 and $1.90 billion in 2010. That’s a commendable growth rate of 28% in this economic atmosphere and a multiple of 34 times 2010 analyst estimates. With Kindle and Whispersync, the company is building a launching pad that will continue to lift the stock for the next five years. This disruptive innovation justifies a long term buy that will continue to book profits for years to come.

Comments

[EdG:]

While I love Amazon and especially buying books second hand for ridiculously small amounts, I believe it it greatly overpriced at 32 billion or two times total sales. The time to buy was in November at half of its current share price and the time to sell would be into the current rally. As for Kindle this business is based on the quality of the reader, is it possible for Apple, Sony or even Google to come up with better hardware.

Apr 02 09:09 AM

[raytayzmd:]

...I agree overall and in particular with "Kindle Revolutionizes Author – Reader Relationship"...Amazon already offers a self-publishing service and now Kindle offers a mechanism that is both cheaper and more facile than what anyone else offers...this makes it easy for individuals to write and publish anything from specialized work -- e.g. a scientific research where priority is always important -- to instruction manuals to etc, etc...I think it is potentially a revolution of democratizing publishing.

Apr 02 09:45 AM

[Harry Tuttle:]

Great company, very expensive stock.

"Long term buy" was also widely used during the dotcom bubble. Usually to justify an expensive stock.

Apr 02 09:54 AM

[Roger Knights:]

"As for Kindle this business is based on the quality of the reader, is it possible for Apple, Sony or even Google to come up with better hardware."

Sony's hardware was better than the first Kindle, but what put Amazon ahead was and is the breadth of its offerings, its convenient and well-trusted store, its built-in cell phone, and the lower prices of its books.

Apr 02 10:01 AM

[User 387480:]

This is a HORRIBLE statement. The Kindle has been out for a LONG time and NOONE I know has one. Plus the kindle is not forward thinking; it hits exactly what people expect (or expected 5 years ago); I assume Apple will come out with a 10 inch iPod Touch this summer which will have a much, much improved performance and will be able to do gaming, ebooks (and full color magazines, etc), all Apple Apps, and more.... this KINDLE statement is RIDICULOUS at best and shows you have NO CLUE about anything.

Apr 02 11:02 AM

[Optionsforme:]

Right buy Amazon at a PE of 50 PEG over 2.5 and 11 times book. Now is a good time since everyone in coming out with a competitor to the Kindle that will leave Amazon only a small fraction of the market. The economy is so good that everyone has an extra $359 to buy a book reader, more important than food. You would buy Amazon when Kindle may add 1 cent to earnings ? Please let me sit down. Amazon is a Scam stock that is highly manipulated, how else can you explain the nosebleed metrics. You wnat to buy a retailer when 750k jobs are being lost every month and the stock earns a whopping $1.48 for 2009 ? If Kindle sales are so good why won't Amazon say how many they sold ? They dd with the Harry Potter book, Kindle is a niche market that will not add much to Amazons bottom line. Telling people to buy the stock at this price is at best irresponsible when you do not disclose how ridiculously overvalued this stocks is. Is it Aprils Fool again ?

Apr 02 12:19 PM

[Optionsforme:]

Amazon is slated to have zero to negative growth in 2009, would you pay 50 times earnings and a PEG of 2.5 for that ?

Apr 02 12:20 PM

[raytayzmd:]

...I kind of suspect you and "User 358964" are one and the same...sounds like it must be pretty painful to be short AMZN right now, huh?...sorry.


On Apr 02 12:20 PM User 368236 wrote:

> Amazon is slated to have zero to negative growth in 2009, would you
> pay 50 times earnings and a PEG of 2.5 for that ?

Apr 02 10:54 PM

[Mark Fidelman:]

The AMZN price on April 2nd was $76.34 today it closed at $85.68 Would have been a great investment.

Jun 03 09:25 PM