Is Amazon’s Kindle Success Sustainable?

Includes: AAPL, AMZN
by: Ockham Research, Inc. (NASDAQ:AMZN) stock has been lifted more than 12% by a surprising report from Citigroup analyst Mark Mahaney. By his estimation, Amazon could sell 380,000 Kindle units this year as a hot gadget for the upcoming holiday shopping season. This is a doubling of his previous estimate, and interestingly, this is exactly the same number of units that Apple’s (NASDAQ:AAPL) revolutionary iPod sold in its first year. Much of this is speculation as Amazon has not officially reported any sales results for the Kindle thus far, but Mahaney cites, among other “additional data points”, a blog post from TechCrunch which credits a source close to Amazon claiming 240,000 units sold to date.

One thing we do know: Amazon has increased the number of titles available on the device since inception from 90,000 to 150,000. The potential in this digital reading device is clearly comparable to that of the iPod, but is it the “game changer” that Mahaney claims? If Mahaney is correct it will certainly be a nice boost to AMZN’s bottom line, as he has upped his 2010 revenue specifically from the Kindle from $400-$750 million to as much as $1 billion.AMZN

The growth potential is there, as consumers proved with their quick adoption of digital music players: people love to have access to many different options available at their fingertips at any given time. There is value in efficiency as well as mobility. Having the ability to have nearly 200 books, magazines, and newspapers all in one source will excite many readers. Students are an obvious target consumer for the Kindle; they would be able to carry text books as well as additional reading materials housed in one handy device.

We see a few potential stumbling blocks to the Kindle revolutionizing reading the way that the iPod has with listening to music. First, there is the lack of product visibility. The product was introduced late last year and the only place I have seen it is on Amazon’s website. Sales seem to be strong, but in order to take it to the next level perhaps an advertising and marketing effort will be needed, as Apple has done so successfully. Next and most obvious to me - the size of the Kindle is not conducive to the greatest mobility. In contrast to the iPod, the Kindle will not fit in your pocket and thus necessitates a carrying case or bag.

Third and in my view most important, the device lacks the “cool factor” that the iPod had and continues to have. If the Kindle was competing with the first generation iPod it might hold up, but improvements over the last 7 years leave the Kindle looking rather unsophisticated. The Kindle will most likely compete with the 3G iPhone as the hot gift this Christmas. In comparison, the Kindle lacks color screen, touch screen, phone, internet, camera, text messaging, music, video and the list goes on.. while the iPhone already has Apps on it that will allow digital reading as well as internet articles, an ever growing source of reading material.

The Kindle has wireless cap abilities but they are confined to searching and downloading Kindle content. Amazon CEO Jeff Bezos has aspirations to bring more multi-media content to the Kindle but the current version is severely lacking. What does the Kindle have that will make the holiday shopper say, “Wow, I need a one of those”? This brings us to the final flaw of the Kindle, the price tag. Retailing for $360, the Kindle is anything but cheap, and although throughout the course of a contract the iPhone is more expensive, consumers will likely balk at the sticker shock.

Simply put, there is potential for the Kindle to be the digital reading device of the future, but stiff competition from Apple will leave Amazon behind these lofty sales targets after the holidays. We are not going to get caught in the hype of this report as we reaffirm our Hold rating at these 7 month high prices.