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Will Kindle become ipod for Amazon?

Will Kindle become ipod for Amazon?
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First Published: Sat, Jan 10 2009. 12 30 AM IST

Updated: Sat, Jan 10 2009. 02 59 PM IST
What’s the Kindle worth? Amazon.com Inc.’s hand-held electronic reading gadget is selling like hot cakes. It sold out over Christmas. Those available second-hand are going for up to twice the $360 (about Rs17,600) retail price. Assuming the success of the Kindle partly accounts for Amazon’s crazy stock price, there may be a way to assess its value.
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Consider Amazon’s core business selling books, DVDs and all manner of other goods online. Analysts estimate the company’s sales will grow by 12.5% this year. Rival Wal-Mart Stores Inc. will see sales rise by only 5%, though analysts think its earnings will grow slightly faster than Amazon’s, reflecting Wal-Mart’s economies of scale and investment at Amazon.
Still, with robust sales growth, Amazon deserves to be valued at a higher price-to-earnings ratio. At 20 times earnings—a generous 50% premium to Wal-Mart’s current 14 times—Amazon’s core business would be worth about $13 billion.
Amazon’s current $24 billion market capitalization represents a whopping premium to that figure. Even stripping out $2 billion of cash, $9 billion of value is apparently unaccounted for. Could that be the Kindle premium?
Well, Amazon is trying to copy Apple Inc.’s stunning success with its elegant iPod and cheap and user-friendly music store. The Kindle is not there yet, but it is getting closer. This year, Amazon is redesigning it and a student version is also expected, an attempt to snag part of the $5.5 billion annual US college textbook market.
IPod sales grew fourfold in 2004 after Apple introduced its second-generation device. If Amazon could achieve a similar trajectory, that would mean selling 2.2 million Kindles this year, based on Citigroup Inc.’s estimate of 2008 sales. At an iPod-like 30% net profit margin, that would bring in around $240 million in earnings.
Then there are e-book sales. If every existing and new Kindle owner were to buy two $10 books a month, and assuming a 15% margin on these sales, total Kindle earnings could top $330 million. The $9 billion Kindle premium would then amount to something like 27 times expected earnings from the gadget. That’s lofty, but as anyone who bet against Apple and its iPod a few years ago can attest, not necessarily out of this world.
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First Published: Sat, Jan 10 2009. 12 30 AM IST
More Topics: Amazon | Kindle | Ipod | Breakingviews.com | India |