It’s Time for Amazon to Open Its Black Box;’s Kindle business is big and growing bigger. How big, and how fast? No one knows. A risk for investors


It’s Time for Amazon to Open Its Black Box

By ALEXANDER EULE | MORE ARTICLES BY AUTHOR’s Kindle business is big and growing bigger. How big, and how fast? No one knows. A risk for investors.

In the coming days, will turn up its marketing muscle to promote its latest tablet, known as the Kindle Fire HDX. The device went on sale last Friday, and it has received hefty praise from gadget reviewers. At $229, the tablet undercuts Apple‘siPad mini by $100. If recent history is any guide, the new Fire will jump to the top of sales charts at Amazon, and the company will tout its success with a rather vague set of pronouncements. And then the news flow will come to a halt.A major piece of Amazon’s growing empire remains essentially a mystery to investors. Wall Street estimates of Kindle sales vary dramatically, often by millions of devices, according to our reporting. (ticker: AMZN) has never released solid sales figures for its family of Kindle e-readers and tablets. Last November, the company issued a press release titled, “Worldwide Kindle Device Sales More Than Double Last Year’s Record Over Holiday Shopping Weekend.” The catch is, the company had never established the year-earlier record.

“They are remarkably adept at putting out a good press release that shows their forward momentum without actually showing their cards,” says Tom Mainelli, who covers tablets for market-research firm IDC. Apple (AAPL), not exactly a fountain of disclosure, issues specific sales data on the iPad and iPhone.

Firms like IDC, along with Wall Street analysts, are left trying to cobble together crumbs of data from suppliers and manufacturing plants. It’s a worthwhile effort—the Kindle has become a major part of Amazon’s business. In August, Morgan Stanley estimated that the Kindle ecosystem—the devices plus all of Amazon’s digital books, music, and movies—was worth $23 billion. To put that number in perspective, it’s $3 billion more than the soaring value of Netflix (NFLX).

Morgan Stanley analyst Scott Devitt thinks the Kindle franchise is underappreciated. “When we went into the project, I didn’t anticipate that we would come to the outcome that it was worth over $20 billion. I was surprised by that number,” Devitt told me. In order to calculate the value, Devitt applied an HP/Dell-like sales multiple of 0.5 to his Kindle-device estimates and a Netflix/Pandora sales multiple of three on digital content.

Morgan Stanley has sound logic for the valuation, but it’s ultimately based on sales figures that aren’t much more than educated guesses. Six years after the first Kindle launched, Wall Street is still trying to get a handle on the sales. Last week, I e-mailed 45 analysts who cover Amazon. Six of them shared specific Kindle estimates. The results underscore the black box that is Amazon.

For 2012, their Kindle Fire estimates ranged from seven million units sold all the way to 12.6 million. For this year, the same analysts have a range of 10 million to 22.1 million. At an average selling price of, say, $200, that represents a sales-estimate range of $2 billion to $4.4 billion. Kindle e-reader estimates were similarly disjointed.

Last year, Apple sold 58 million iPads, generating revenue of $32 billion.

IDC, for its part, believes Amazon shipped 10.5 million Kindle Fires last year. “I have a high level of confidence in the information that I get from my people in Asia,” Mainelli says. As for Wall Street’s inconsistent numbers, he adds, “It’s not surprising, just because I know the level of work and the number of people that it takes to pull those numbers together in any meaningful way.”

An Amazon spokeswoman declined to answer questions about the disparity in the estimates, citing Amazon’s policy of not disclosing sales data. It has become par for the course at Amazon. The company has never disclosed the exact number of distribution centers it has in the U.S., and it provides no breakout on its increasingly popular cloud-computing business called Amazon Web Services.

“Amazon sticks to what the SEC demands them to disclose, and it doesn’t disclose anything else,” says Oliver Wintermantel, a retail analyst at ISI Group. ISI uses quarterly customer surveys to inform its Amazon estimates.

HERE’S WHAT WE CAN FIGURE OUT with a fairly high degree of certainty: Amazon is making progress on the tablet front. After starting nearly two years behind Apple, the company is increasing Fire sales at a brisk pace. Using the midpoint of analysts’ estimates, Kindle Fire sales should reach 27 million by 2014, up from 10.4 million last year. That’s an annual growth rate of 61%, faster than the tablet industry pace of 52%, according to research firm Gartner.

The general assumption is that e-readers, the category of black-and-white devices popularized by Amazon, will slowly fade in popularity as tablets become the go-to mobile device. It’s an unfortunate trend in this reader’s view; Amazon has created arguably the perfect reading device in its latest Kindle e-reader (see Gadget, “Amazon’s “All New” Kindle Paperwhite.”).

SO HOW MUCH DOES ANY OF this really matter? Amazon most likely sells its Kindle devices at cost, so unit sales don’t have much direct impact on earnings. In his most recent annual letter to shareholders, founder and CEO Jeff Bezos wrote, “Our business approach is to sell premium hardware at roughly break-even prices. We want to make money when people use our devices—not when people buy our devices.”

That begs the question: How much digital media is Amazon selling via Kindle e-readers and Kindle Fire tablets? Here again—no numbers from the company. Morgan Stanley estimates Amazon sold $2 billion worth of digital media in 2012, growing to $3.8 billion this year. Those numbers become significant because digital media carries a higher profit margin than paper towels or printers.

But the more important issue, I’d argue, is the degree to which Amazon has become a tangled web of information, a concern recently highlighted by my colleague Jack Hough (“ Dangerous for Competitors—and for Shareholders,” Oct. 7). Analysts are constantly trying to keep up with Amazon’s complex, interwoven set of businesses. And investors are left in the dark.

“The thing with Amazon is there’s always this perception that it’s still growing, and that the big profits are still in front of it,” says Mainelli from IDC. “And so, [analysts] just give them more runway.”

Investors should demand to know a little more about the business they’re buying, particularly with Amazon shares trading at a bubble-like 114 times next year’s earnings estimates. The time has come for Amazon to share its own book.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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