Amazon Beefs Up Kindle Franchise

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Kindle "is becoming the iPod of the book world," and sales could reach $1 billion by 2010, wrote Mahaney, who rates Amazon a "buy."

Despite the August gains, Amazon shares are still down almost 12% this year. Amazon hasn't disclosed sales of Kindle, and some Wall Street analysts say the company's stock has rallied on what are still theoretical estimates for future sales of the e-book device. Amazon trades at 52 times expected 2008 earnings, a valuation level that American Technology Research analyst Tim Boyd said in an Aug. 12 research note is too high, given Amazon's exposure to the U.S. dollar. "In terms of valuation, sanity has left the building," wrote Boyd, who has a "sell" rating on the stock. By contrast, eBay (EBAY) trades at 14 times 2008 earnings and Google (GOOG) at 24 times forward earnings.

Tipping the Balance

Amazon isn't saying much about its plans for the recent purchases. A spokeswoman says Shelfari and LibraryThing "are innovating in ways that are great for book lovers," but declined to elaborate. In an Aug. 25 blog post, Shelfari co-founder and Chairman Josh Hug wrote, "With more resources and Amazon's expertise in building a platform where people come to share ideas, there are a lot of new opportunities."

In the meantime, Amazon will need to contend with LibraryThing's outspoken president, Tim Spalding, who wrote in an Aug. 25 blog that "once the Amazon/Shelfari deal goes through, we are competing against Amazon."

Kindle's potential alone may not be a reason to buy or sell Amazon. Even if Kindle meets Wall Street's most bullish expectations, sales of the devices and e-books would still account for just 4% of projected 2010 sales. But with investors divided on whether Amazon should be valued like a cash-rich tech company or an economically risky retailer, a breakout e-book performance this year could tip the balance in Amazon's favor.

Ricadela is a writer for BusinessWeek.com in Silicon Valley.