The Kindle 3G page on Amazon (NASDAQ:AMZN) [1] proudly states that Kindle is Amazon’s number 1 bestseller and has the most 5 star reviews of any product on Amazon. After last month’s successful launch of the discounted add-supported Kindle, [2] which became the bestselling member of the Kindle family in U.S., Amazon recently launched a discounted Kindle 3G. In a previous article, we noted that the April launch of a discounted Kindle might not translate into significant gains for Amazon’s stock, as Kindle represents only 1% of Amazon’s stock value by our estimates. [3] We maintain that the new discounted Kindle 3G might add significantly to Kindle sales but will not translate into much upside for Amazon’s stock. 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 $199 for Amazon’s stock, roughly in line with market price.
The New Kindle 3G with Special Offers
Amazon is discounting Kindle 3G by $25. The catch? Amazon will send special offers and sponsored screensavers on the Kindle screensaver and on the bottom of the home screen. Amazon contends that these advertisements don’t interfere with the reading experience and, given the boom in sales of the previous add-supported Kindle, customers appear to be fine with the tradeoff.
Minimal Impact on Amazon’s Stock Price
Our base case estimates suggest that Kindle’s sales volumes will jump to 12 million units in 2011 from 8 million units in 2010, and thereafter grow to 22 million units by the end of our forecast period. Even though sales of the add-supported Kindle and Kindle 3G might accelerate the growth in sales volume, we do not foresee significant upside to Amazon’s stock price because of its low sensitivity to Kindle revenues.
Advertising Revenue Will be Partially Offset by Kindle Price Reductions
Moreover, while we currently forecast declines in Kindle’s operating margins, this number could actually tick up due to additional advertising revenues. But this increase will be partially offset by continued decrease in Kindle prices.
Drag the trend line in the interactive charts above to see the impact of various scenarios on Amazon’s stock value.
See our complete analysis for Amazon’s stock here
Notes:- Amazon: Kindle 3G wireless reading device [↩]
- Amazon Press Release: Kindle with Special Offers for $114, April 11, 2011 [↩]
- Investors Shouldn’t Get Too Excited Over New Discounted Kindle [↩]
