Can Kindle Sales Help Amazon Prove Analysts Wrong?

Morgan Stanley downgraded Amazon

yesterday, citing "mixed data points" that suggest the company's stock might hit a ceiling soon. Analysts at the investment firm believe that the company will see lower sales volumes as the transition to tablets forces the company to accelerate its transition to digital media sales. Analysts downgraded the company to equal weight and removed their former price target of $220. Estimating an EPS of $1.05 for 2012 (down over 23 percent from 2011's actual figures), Morgan Stanley is expecting a slowdown in revenue growth that will hit the company's compound annual growth rate (CAGR) to 23 percent over five years. That is still an impressive level of growth, but analysts fear that Apple's

iPhone and iPads are eating up too much market share and offset any growth in Kindle growth, which they expect to see in international markets. Unfortunately for Morgan Stanley--and those who sold on the downgrade--was news that, according to research firm IHS, Amazon has surpassed Samsung as the world's biggest seller of tablets besides Apple's over 50 percent market share. While Amazon does not release specific Kindle sales figures, the Kindle Fire has grown in popularity thanks both to an aggressive push of the product and an attractive price point. That price point may hinder the company's bottom line if IHS is also correct that the company sells the product

. But since tech component prices fall relatively quickly and the loss margin is $2.70 compared to the device's stick price, that loss may not make a dent in the company's earnings. Last year, the company's EBITDA was $2.66 billion on revenue of $48 billion, and those figures are expected to rise to $3 billion and $63.5 billion (according to Morgan Stanley). It would take a lot of Kindle Fire sales to hit that bottom line--many more than the hit that subsidies took on Verizon

, AT&T

, and Sprint

. Plus, those losses will quickly be recouped by Amazon's ecosystem, which is the reason for the loss in the first place. Kindle Fire users need only buy one expensive ebook or a few apps in the company's Kindle Store to recoup that loss. When shares in Amazon tanked Thursday, investors were worried that the company's strong growth would be challenged by Apple and other tablet makers in what is becoming a crowded market. The company has already been hit by disappointing earnings, after Q4 2011 results fell below analysts' expectations. Morgan Stanley's downgrade may prompt lower expectations, which will result in lower guidance and thus a lower bar for Amazon. The company may find it easy to impress analysts, causing the stock to rise higher. On the other hand, the company is trading at a P/E ratio over 131, making the stock more expensive than it has been since 2004. If a correction to the market's recent rally puts pressure on tech stocks, it may hit Amazon harder than others since it has become more expensive than ever. Apple, on the other hand, is trading at a P/E ratio of 14.30, nearly ten times less than Amazon and only slightly higher than recent levels--and still lower than last summer's P/E of over 16. Even with yesterday's pullback, Amazon is expensive, but a rally may be on the horizon either in response to IHS or in response to a surprise at the company's next earnings release in spring. Apple, on the other hand, is still cheap, even above the $500, but that may not stop investors from balking at the psychologically important milestone.