Encouraging e-Book Sales and Competitive New Services Signal Bright Prospects for Amazon

Amazon (NASDAQ:AMZN) started as an online book seller before diversifying to be the multi-service provider it currently is. The company is credited with revolutionizing the ebook market by introducing the Amazon Kindle. The Kindle enables the user to read the electronic copy of a book on the move without worrying about the weight and volume that is usually associated with a physical book. It also enables users to carry multiple books, all in electronic form, at the same time and read them wherever they want, while at the same time providing the reader some privacy from their surroundings.

Amazon sells DVDs and music as well. Recently, it introduced the Amazon Cloud Player which lets users purchase music online and stream it to their devices. The Amazon Cloud Player is in direct competition with the Apple iTunes service.

Below, we’ll take a look at the trends which are influencing the Books, DVDs and Music division of the company. It contributes approximately 23% of our valuation of the company.

We currently have  $222 estimate for Amazon which is approx. 8% below the market price

Healthy books sales and new improved media streaming capabilities

The company has offset shrinking book sales which shrunk to near 2002 levels last year, by consistently increasing its market share. This has been supported in no small measure by the rapidly growing sales of e-books. According to media releases from the company, e-books now sell more copies than printed books in the US and UK on its portals. Also, with the launch of Amazon Cloud Player and Amazon Instant Video, the company is aiming to become a force to reckon with in the online media streaming business as well. With its services supported by the Amazon cloud services, which lets consumers stream data over a wide variety of supported devices, the company holds a strategic advantage over some of its competitors.

We expect the company to marginally boost its market share in the online Books, DVDs and Music sales from the current level of 35% to 36.4% by the end of our forecast period even as it faces competition from Apple’s iTunes, Barnes and Nobles (NASDAQ: BKS) Nook service and Netflix (NASDAQ: NFLX).

The rumored new Kindle Fire can be a game changer

The company launched the Kindle fire, a Google Android OS based tablet, in late 2011 to compete in the quickly saturating tablet market. The tablet faces direct competition with market leader Apple‘s (NASDAQ:AAPL) iPad and Google‘s (NASDAQ:GOOG) Nexus devices. Even though the company trails the market leader Apple by a huge margin, the Kindle Fire  brings in additional revenues for the company as it drives substantial sales to the company’s e-stores (books, apps, music and video streaming services).

Rumors have been going around that a new updated Kindle Fire could be launched in the current quarter. These are supported with the sudden availability of current Kindle devices at heavily discounted prices. A new rumor states that the new device may be offered for free with an Amazon Prime membership. With the other Android based tablets running the latest version of Android OS, an update would place the new Kindle Fire on a level playing field.

Coupled with aggressive price cuts (Kindle prices dropped from $380 in 2008 to approx. $140 currently) and the multitude of services it offers, the new Kindle should offer better competition to the rumored iPad mini and Nexus. We expect Kindle sales to double from our current estimate of approx. 30 Million units annually to approx. 60 Million by the end of our forecast period. Kindle Hardware currently contributes 3.2% to our price estimate for Amazon.

You can read about trends we expect to impact the Electronics and General Merchandise division here. In the next article of the series, we will look at the trends which may influence the Cloud and Other Web Services division.

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