Why Amazon’s Deal With Target Could Be Good News For HHH

by on June 3, 2010 | ETFs Mentioned:

Technology firms, many of which rely on Europe for significant portions of their sales, have seen their share prices sink over the last month as the sovereign debt crisis has called into question growth prospects in the region for the foreseeable future. One hard hit company has been Amazon.com which has seen its shares fall by close to 18% since peaking on April 22nd. In addition to concerns regarding Europe, the company has taken a hit over fears regarding sales of its key e-reader, the Kindle, in light of new competition from the more expensive and more technologically impressive iPad from Apple. However, Amazon.com has recently upped the ante in the e-reader wars by signing a deal with Target, announcing that it will begin selling the Kindle in all of its 1,740 stores starting June 6th. This could potentially open up the Kindle to a new massive market by having its product in the second largest retail store in the country. This new development could potentially boost Kindle sales and in turn, boost sales of books for Amazon.

Stock research firm Trefis believes that roughly 5% of Amazon’s stock price is directly related to sales of the Kindle device. However, this estimate does not take into account the large number of e-books and other multimedia which are sold on the device. “For every 100 copies of a physical book we sell, where we have the Kindle edition, we will sell 48 copies of the Kindle edition,” said Amazon.com CEO Jeff Bezos recently. “It won’t be too long before we’re selling more electronic books than we are physical books.” Bezos went on to say that his company keeps 65% of e-book revenues, potentially creating a cash cow for the firm. In fact, some analysts believe that sales of the Kindle and books for the device could total more than $1.2 billion for 2010; potentially 5% of the company’s entire revenue and a big jump from the meager $153 million generated in 2008. If Amazon is able to keep up this impressive growth, it could give the company’s stock a badly-needed boost (for more ideas with a long-term focus, see Long Live Buy and Hold).

Internet HOLDR In Focus

Amazon is a component of several ETFs in the Technology Equities ETFdb Category, but no fund is impacted more by the company’s performance than the Internet HOLDR (HHH). Like most HOLDRs, HHH is incredibly concentrated; it holds just 13 securities and has almost 99% of its assets in its top ten holdings (also read Five Facts About HOLDRs Every ETF Investor Must Know). Amazon.com makes up the top holding in the fund, comprising about 38% of the total assets. Large allocations are also given to eBay (20%), Yahoo! (13%), and Priceline.com (8%). Although the fund is up 24.8% over the past 52 weeks, it is down 6.5% over the course of 2010. If the Kindle is able to get a boost out of its new home at Target stores, look for HHH to be especially in focus.

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Disclosure: No positions at time of writing.