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Amazon.com (Nasdaq: AMZN ) shares shot up 9% yesterday, assisted by the favorable tailwinds from Citi analyst Mark Mahaney, who boosted his Kindle sales target. Mahaney now thinks Amazon's e-book reader can become a $1 billion product line in 2010.
This is an ambitious upgrade to what was already a pretty aggressive forecast. Back in May, Mahaney pegged the Kindle's 2010 top-line prospects to be in the $400 million to $750 million range.
It's also a gutsy call, coming after supply hiccups marred the Kindle's November launch and also considering that the typically chatty Amazon has been uncharacteristically tight-lipped about actual unit-sales data. However, Mahaney is willing to show his math. He believes Amazon can sell more than 3.3 million Kindles in 2010, at a price point that roughly $100 cheaper than today's $360 asking price. He also sees digital-book sales matching the recognized hardware revenue.
In arriving at his eye-rubbing figures, Mahaney compares the Kindle's adoption cycle to that of video-game consoles and the iPod. The difference is that video-game systems are a proven commodity. New systems simply replace current-generation consolers. The public still hasn't warmed up to reading electronic books.
If anyone can change that situation, it's Amazon, given its pole position in online retailing. The rub is that Amazon isn't exactly turning heads in digital-music sales, where it sorely trails Apple (Nasdaq: AAPL ) , or in digital video, where its Unbox service didn't wow the world, even after teaming up with TiVo (Nasdaq: TIVO ) to deliver premium movies and television shows directly into home-theater systems.
There is already online chatter about new versions rolling out in time for this year's holiday push. Even Mahaney concedes price cuts in the near future. The key challenge for Amazon is to roll out cheaper and better Kindles without alienating its early adopters.
There is plenty at stake with the Kindle, and it's not all about Amazon. If the company does sell a cumulative 4.5 million Kindles by the end of 2010, what will that mean for conventional book retailers? If millions of the reading world's biggest fans are buying digital reads, won't chains such as Borders, Barnes & Noble (NYSE: BKS ) , and Books-A-Million (Nasdaq: BAMM ) suffer? Of course they will. However, shares of all three book retailers rose nicely yesterday.
That's typical Wall Street for you. It either fails to recognize that there are two sides to every story or misreads the obvious plot points in the next chapter.