Will Amazon's Kindle Save Newspapers?

05/28/2009 1:00 pm EST

Focus: STOCKS

Jocelynn Drake

Financial Analyst, Schaeffer's Investment Research

Jocellyn Drake of Schaeffer’s Investment Research says the new e-reader may help power the online retailers’ shares still higher after a great run.

A recent article in Fortune (“Amazon’s Next Revolution,” May 26) takes a look at Amazon.com (NYSE: AMZN) and the company's latest release of its Kindle DX, which is a large-screen e-reader designed to optimize the presentation of newspapers and textbooks.

According to the article [by senior editor Jeffrey O’Brien], "The $489 tablet technically is portable, but slides comfortably into no pocket." Chairman Jeff Bezos is extremely high on the device and notes, "’Kindle sales have exceeded our most optimistic expectations.’" Furthermore, Barclays Capital predicts Kindle devices will produce $840 million in profit on $3.7 billion in sales in 2012. That's roughly 20% of Amazon's total sales and profit today. A recent Citigroup report pegged total Kindle sales at roughly 500,000 units.

However, what has piqued interest is the device's link to the newspaper industry, which is struggling to make a buck in a time when subscriptions are down and the industry is trying to find a way to effectively monetize its Internet offerings. In fact, the article even asks, "Could this rather plain-looking and pricey gadget actually pull off something so monumental as reversing the slide in book publishing and saving newspapers? Um, maybe?"

Even though much newspaper content is currently available free, legally, on the Web, AMZN executives note, newspapers are selling well on Kindle, in no small part because of Amazon.com's "seamless back-end billing and stealthy delivery." So there are signs of change in consumers' behavior. Furthermore, at the DX unveiling, The New York Times and The Washington Post both announced test programs in which they'll subsidize the cost of the device in exchange for long-term subscription commitments in parts of the country where delivery is not available.

The shares of AMZN have been on a tear this year, soaring more than 50% higher since the start of 2009, easily outstripping the broad market. (It closed below $78 Wednesday—Editor.) In fact, the equity has soared more than 120% from its November 2008 low of $34.68. During this time, it has been ushered higher by the steadfast support of its ascending ten- and 20-week moving averages.

Despite the stock's stellar performance, we find some lingering pessimism among investors as they attempt to call a top to the stock's ascent. Wall Street has awarded the stock six Buy ratings, 13 Holds, and one Strong Sell, according to Zacks Investment Research. This configuration leaves ample room for potential upgrades, which could help to buoy the shares.

Meanwhile, short sellers are getting shaken out of their bearish bets. During the past month, the number of AMZN shares sold short have dropped by 15% to 22.3 million. However, more than 6% of the company's total float remains sold short, offering up ample sideline money to fuel the stock higher should the bears continue to unload their short positions.

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