Kindle Price Cuts Will Help Sales but Hurt Amazon’s Margins

Amazon’s (NASDAQ:AMZN) Kindle, which competes with Barnes and Noble’s (NYSE:BKS) Nook, Sony’s (NYSE:SNE) e-Reader and Apple’s (NASDAQ:AAPL) iPad, is now priced at $189, a reduction of almost 30% from the previous price of $259.  Amazon’s price reduction was triggered by a price cut from Barnes and Noble on its Nook’s e-reader, which is now priced at $199, down from $259.

We have updated our Amazon analysis to reflect the Kindle’s lower pricing and expected margins declines.  Although we had anticipated price declines for the Kindle over time, the latest price cuts exceeded our expectations and led us to revise our forecasts.  The revision had about a $4 negative impact on our earlier estimate of $123 for Amazon’s stock.

Kindle’s Pricing Could Decline to $145

We now estimate that Kindle Hardware constitutes around 1% of the updated $119 Trefis price estimate for Amazon’s stock. We forecast that the average Kindle pricing will decline from $310 in 2009 to $145 by the end of Trefis forecast period.  There could be significant downside to this forecast if the rate of recent price cuts were to continue and players in the e-reader space were unable to stem declines through the introduction of higher end e-reader features.

Kindle’s Operating Margins Will Get Hurt

We believe that Amazon would have managed to keep Kindle’s operating margins constant at around 10%, had the pricing declines happened more gradually and slowly. This is because a gradual and slow price decline would have compensated for a gradual input cost decline, keeping margins relatively constant.

However, with faster pricing decline than expected, we are now forecasting that Kindle’s margins will decline from 8% in 2009 to around 4% by the end of the Trefis forecast period.

You can see the complete $119 Trefis Price estimate for Amazon’s stock here.