Analyst upgrades Amazon.com on belief that investors underestimate Kindle’s market power

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Ahead of the Bell: Analyst upgrades Amazon.com

PHILADELPHIA — An analyst upgraded Amazon.com Inc. Monday on the belief that Wall Street is underestimating the market power of the company’s Kindle device as consumers increasingly gravitate toward reading books electronically.

Collins Stewart analyst Sandeep Aggarwal upgraded Amazon.com to “Buy” from “Hold” and set a $150 price target on the shares.

While noting that Amazon’s shares have fallen by 15 percent from its recent peak, Aggarwal was more excited about the multibillion dollar business opportunities that Kindle and its related services would provide the company. He thinks analysts are underestimating Kindle’s revenue contribution by $600 million this year.

“We believe the eBook revolution is much bigger than we and the Street previously thought,” Aggarwal said in a research note.

He is forecasting that Amazon.com will ship 3.85 million Kindles and generate $2.5 billion in related revenue, leading to $620 million in gross profit. The analyst raised his 2010 earnings per share estimate by 8 percent and 5 percent for 2011.

Aggarwal acknowledged that competition in the eBook field is rising — with the iPad the most recent entry from Apple Inc. — but said the market remains in its early stage.

He believes that Kindle is “one of the most compelling eReaders” and expects the company to add color and touch-screen capability to the device to compete with the iPad.

Amazon.com’s core business as an online marketplace remains the “gold standard,” even with competition from Wal-Mart Stores Inc. and eBay Inc., he said.