Amazon (NASDAQ:AMZN) recently announced a new ad-supported version of its popular e-book reader that will sell at a discount. [1] We believe that the new Kindle will be popular amongst advertisers but might not translate into significant gains for Amazon’s stock, as Kindle only represents 1% of Amazon’s stock value by our estimates. Most of Amazon’s value comes from its traditional online retail sales, in which it competes with other large corporations like eBay (NASDAQ:EBAY), Overstock.com (NASDAQ:OSTK) and Wal-Mart (NYSE:WMT).
We currently have a price estimate of $181 for Amazon’s stock, in line with market price.
The New Kindle
The new ad-supported Kindle is priced $25 less than the standard model and will be supported by placing ads in a number of different places – as banners at the bottom of home screen and as screen-savers. Given that Kindle sold about 8 million units in 2010, this has understandably excited many marketers and advertisers. Still, we do not foresee any significant impact on Amazon’s stock value.
Volume and Profit Margin Growth, but No Change to Stock Value
Our base case estimates suggest that Kindle’s sales volumes will grow from 8 million units to 22 million units by the end of our forecast period. But this scenario could prove conservative given upside from the new, discounted Kindle. Drag the trend line in the interactive chart above to see how upside to Kindle unit sales could affect Amazon’s stock value.
Moreover, while we current forecast declines in Kindle’s operating margins, this number could actually tick up due to additional advertising revenues. You can test this scenario by dragging the trend line in the interactive chart below.
See our complete analysis for Amazon’s stock here
Notes:- Bloomberg: Amazon to Sell Kindle Digital Reader with Adds for $114, April 2011 [↩]
