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eReader Wars: Kindle vs. Nook

Amazon Investors May be Celebrating Too Early

Written by Brian Hicks
Posted January 4, 2010

On Christmas Day 2009, Amazon.com sold more electronic versions of books than print versions.

It's a clear sign of the monumental shift underway in book publishing, and investors in Amazon.com have declared victory. (Amazon's offering — The Kindle — is dominating the market so far.)

And their stock reflects that growth, up 182% over the last 12 months. The Kindle is a huge part of Amazon's growth story. They refuse to provide exact numbers, but analysts think around 2.5 million Kindles have been sold since its launch in 2007.

Forrester Research says around 3 million eReaders total were sold in 2009... and they expect that number to double in 2010.

That kind of growth reminds me of Apple's massive success during 2004 and 2008 with the iPod.

So what's the draw of eReaders... and is there another winning play for investors, besides Amazon?

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I didn't really get it myself, until my wife bought me a Kindle for Christmas. It's an amazing little device. First, these readers can hold 2,000+ books, which each take about 5 seconds to download.

The screens are another big selling point. They aren't like normal computer screens; the technology uses electronic ink that is physically moved around on the screen (imagine a high tech etch-a-sketch), so there's no eye-strain. And the battery life is amazing.

It's obvious why investors are excited about this market. There's practically unlimited growth potential. The company whose eReader comes out on top will control the billion dollar e-book market.

The amount of revenue we're talking about here is huge. Some colleges are even starting to use eReaders for textbooks.

The Amazon Story Is Out (and Possibly Played Out)

Wealth Daily's Steve Christ put a buy recommendation on AMZN back in April 2009, when it traded in the $70s. Since then, it's run to $135.

Now it's not cheap by any measure, trading at 53 times estimated 2010 earnings. Apple, by comparison, is trading at 27 times 2010 earnings.

Amazon is flat-out expensive here. But this market is going to be huge. So how can we play it?

I'm looking at Barnes and Noble (NYSE:BKS). In October '09, they announced their eReader: The Nook.

It has received good reviews so far, and they sold out the initial run of 60,000 by early December. They're hoping to sell a million more in Q1 2010. At $259 a pop — plus e-books at $9.99+ each — that's a lot of revenue.

And while the Nook uses the same screen as the Kindle (made by privately-held E-Ink Corp.), it has certain features that really set it apart.

The most obvious difference is a 3.5" color LCD touch-screen. The Nook's navigation is similar to an iPhone, while Kindle uses a mini-keyboard. Here's a look (Kindle on the left, Nook on the right):

nook-kindle-comparison

Nook vs. Kindle Comparison

Advantage, Nook:

  • Wi-Fi access
  • Thousands of free books via Google Books
  • Expandable memory (can use removable 32gb cards)
  • Can lend books to friends for 14 days
  • Can browse any book free for 1 hour in B&N stores
  • Support available in B&N stores
  • Color LCD touch-screen

Advantage, Kindle:

  • Faster page load time
  • Longer battery life
  • Uses Amazon.com accounts and billing
  • iPhone and iTouch compatibility

It seems like a toss-up to me at this point. Both products have their advantages, and the price point is the same ($259).

While a toss-up may not sound encouraging for Barnes and Noble investors, we should realize that this is only the first version of the Nook. If you compared it to early Kindles, there'd be no contest.

I think Barnes and Noble has a real shot at leading the eReader market. And the stock seems reasonably priced here. Here's a look at some key fundamentals:

  • Current Price: $19.12
  • 52 week Range: $14.81 - $28.78
  • Price/Earnings: 15
  • Dividend: 5%
  • Market Cap: $1b
  • Debt: $325m

Conclusion

One of the hottest trends of this new year — and new decade — will be eReaders. Amazon is the obvious play, but Barnes and Noble is an intriguing underdog play. They have a real shot at stealing market share, maybe even taking over the top spot. And if they do, the stock should do very well.

I consulted our resident technical analysis guru, Ian Cooper of Options Trading Pit, and he thinks the chart looks solid here. Ian's take on BKS' chart: "Should MACD (12,26) cross above MACD (9), it could take off. Looks like it could do that soon."

When it comes to charting, Ian really knows his stuff. So I'll take his word for it and mark that down as another positive for the Barnes and Noble stock. With that big 5% dividend, I like BKS even more.

Until next time,

Adam Sharp
Analyst, Wealth Daily

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