While Amazon (NASDAQ:AMZN) is primarily an online retailer that sells third-party goods, it has branched out into other businesses including web services and selling its own Kindle devices. We have previously talked about how the company’s cloud computing and web hosting services are growing rapidly and aiding its EBITDA (earnings before interest taxes depreciation and amortization) margin. In this analysis, we’ll briefly jump into Amazon’s flagship device — the Kindle. The company sells several models of Kindle e-reader and Kindle Fire tablets that are aimed at capturing the fast growing market for mobile devices. We estimate that Amazon’s sales of Kindle devices stood at roughly 2.4 million in 2009. This figure shot up to 20.1 million by 2012, and at that point, it appeared that it could turn into a very big business. Most of this growth acceleration was fueled by the launch of the Kindle Fire tablet in the last quarter of 2011. Amazon garnered some success initially, but the celebrations didn’t last long, as there was a slight decline in 2013.
The outlook looks grim and as a result, we estimate that this business constitutes less than 5% of the company’s value. The overall value of Kindle devices, however, extends beyond hardware sales, and appears to be a strategic pursuit by Amazon to promote and sell digital content. The company earned an estimated $3.9 billion in revenues from sales of Kindle devices, barely enough to cover its net shipping costs of $3.5 billion.
Our price estimate for Amazon stands for $373, roughly in-line with the market price.
Unit Sales Growth Outlook Is Not Encouraging
We estimate that the overall sales of Kindle devices, including the e-reader and Kindle Fire, came down slightly in 2013, amounting to 19.7 million. Much of this can be attributed to growing competition from Android-based tablets, which reportedly took some share away from Kindle. Going forward, there is a good chance that Samsung (OTC:SSNLF), Apple (NASDAQ:AAPL) and other companies will continue to dominate the market with their technically superior products and operating systems that boast a very large app library as well. Additionally, we believe that e-readers may lose popularity and utility as consumers continue to flock towards tablets for multipurpose use. While the overall market growth will continue to create strong tailwinds for Amazon, the competitive factors will keep the growth suppressed. As a result, we forecast Kindle device sales to increase to just 22.6 million by the end of our forecast period.
Average Pricing Growth Can Lend Some Support
The average price per Kindle unit declined from an estimated $299 in 2009 to $136 in 2011 as Amazon introduced cheaper versions of the e-reader. However, the figure has increased in the last two years to an estimated $200 in 2013 as a result of the introduction of the higher-priced Kindle Fire tablet. We expect the average pricing to continue to grow in the foreseeable future due to an increasing proportion of tablets in the Kindle device mix. Kindle Fire is higher priced than the Kindle e-reader, and 3G enabled Kindle Fire tablets are higher priced than the Wifi-only Kindle Fire tablets. There is a strong shift to mobile Internet, which will drive sales of 3G enabled devices and thus, positively impact the average price of Amazon’s Kindle devices.
Disclosure: No positions.