Stocks That Should Profit From eReaders

Once in a while, a disruptive technology offers opportunities to score spectacular returns. While the adoption cycle of eBooks and eReaders is still in its infancy, this technology has the potential to reshape society.

Mark Bernstein, CEO of Xerox’s (XRX) Palo Alto Research Center has described the eReader/eBook as the next disruptive technology while Steve Haber, President of Digital Reading at Sony’s (SNE) Sony Electronics unit calls it 'The beginning of the moment’.

MediaIDEAS estimates sales of eReaders worldwide to reach 6 million units in 2010 from 1.1 million in 2008. The research firm projects worldwide eReader sales to increase to 115 million units by 2013 and 446 million units by 2020.

Like most disruptive technologies, this one comes with its share of ‘obstacles’ that need to be overcome for mass adoption. The list includes cost of devices, need to change reading habits, resolving content ownership rights, and adapting economic models.

Over time, the obstacles are likely to be overcome as advantages provided by eBooks and eReaders for both users and publishers are too compelling to ignore. Here are a few:

In a wired world, users can quickly download oodles of digitized information anywhere and access references like encyclopedias in a jiffy while reading. They can change the text size and instantly share their ideas with friends. Students can save money, avoid lugging heavy backpacks, and customize content to suit their needs.

As for publishers, eBooks cut inventory and distribution costs. They also eliminate the plague of used books.

While playing disruptive technologies is often the realm of growth investors, the eReader/eBook technology offers value investors some promising opportunities as well.

Growth Selections

Shares of eReader makers like Amazon (AMZN) and Apple (AAPL) are right up a growth stock investor's alley. Companies that make eReader components are another way to play the disruptive technology. Freescale Semiconductor, which powers nearly 90% of eReaders, fits this description. Freescale can be a viable investing option when the firm’s private equity owners decide to make the company public again.

Google (GOOG) stock is another alternative to play this disruptive technology. The Internet search giant has indexed over 10 million books in its electronic database. eBooks could potentially become one of many alternatives available to Google to shore up growth.

Value Selections

Shares of eReader content providers including newspaper and book publishers like New York Times (NYT), McGraw-Hill (MHP), John Wiley (JW.A), News Corp. (NWS), and CBS (CBS) are in line with a value investor’s preference.

Several top U. S. newspapers are now planning to offer daily editions on a variety of wireless eReaders next year. The New York Times for example already sells subscriptions to its newspaper on Amazon’s Kindle, Barnes & Noble’s (BKS) Nook, and Sony’s Reader devices.

Academic publishers like McGraw-Hill and John Wiley are trying to extend their distribution beyond large eReader makers like Amazon and Apple. Both publishers have teamed up with Entourage Systems to deliver eBooks. Increasing intensity of competition among distributors can help publishers realize higher value for their content.

Disclosure: I do not have long or short positions in any of the stocks discussed.