Amazon’s reluctance to reveal precise figures on its ebook sales has caused all kinds of ripples within the book world, and beyond. For one thing, it’s been partly responsible for the huge exposure given to Hugh Howey’s AuthorEarnings report. And in the case of stock analysis company Trefis, it’s driven their team to extrapolate Amazon’s ebook sales from sales of Kindle devices, using this to justify their target price of $373 for Amazon’s stock, “implying a premium of 10% to the market price.”
According to Trefis estimates, “sales of Kindle devices stood at roughly 20 million in 2013, bringing about $3.9 billion in revenues.” Proceeding from their (pretty well-founded) opinion that the Kindle franchise “appears to be a strategic pursuit by Amazon to promote and sell digital content,” Trefis then calculates on the basis of ebook sales per reader that “the company may be earning between $265 million to $530 million a year from e-books alone,” while allowing that “that’s still small in comparison to its overall revenues.” This report was first aired on April 1st, but there are no signs that Trefis was joking.
Trefis bases its calculations on a series of assumptions “reasonable enough to give us an idea of a probable range of revenues.” These are: “approximately 30 million Kindle e-readers currently in use;” “average price per e-book at $6,” with 30 percent going to Amazon; and “five e-books sold annually per Kindle e-reader owner” for the lower revenue figure, and ten per e-reader for the higher. Bear in mind also that Trefis is extrapolating from sales of Kindle e-readers alone, not from Kindle Fire tablets or Kindle apps on other devices.
Therefore, if anything, Trefis probably underestimated Amazon’s overall take from Kindle ebook sales by quite a margin. For comparison’s sake, American Association of Publishers figures put ebook sales in the U.S. at $375 million for the second quarter of fiscal year 2013 alone. Trefis also noted in its wider analysis of Amazon’s revenues that books, DVDs, and music altogether contribute only 21 percent of its sales, with general merchandise accounting for 64 percent, and Kindle hardware sales for only 2.9 percent.
It’s interesting also to see where books fit within this breakdown. If Amazon has the kind of firepower from its broader retail operation that Trefis’s analysis suggests, then it can devour any book chain or publisher at leisure. Such outfits are not supported by larger retail concerns, although arguably a publishing group like HarperCollins held within a larger media concern might enjoy similar advantages. Amazon’s supposed competitors might be thankful that it has not used more of this muscle already. Competition watchdogs might want to watch that too.
So if Trefis erred on the conservative side in its estimate of Amazon ebook sales, its 10 percent stock target may also be lowballing Amazon. All those Amazon detractors who pillory the company for plowing its profits back into expansion might want to reflect on this. It suggests that careful analysts are seeing Amazon go only higher.