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How iPad-Kindle Battle Could Affect Amazon Earnings, Share Price

Something investors in Amazon must be asking themselves: Has the Apple iPad caused the Kindle to rapidly fall into obsolescence and, if so, how will that impact the company’s second quarter results?

I know, the quarter isn’t even done yet and Amazon doesn’t report for at least a month. (Watch video below for deatils on the company's last earnings report in April.)

But with the Kindle being sold at Target , and the iPad grabbing mindshare and market share in the world of e-readers, it would appear that Amazon.com is pulling out all stops to keep Kindle’s sales volume from evaporating entirely.

Amazon doesn’t break out Kindle sales, and declined comment. But Jefferies & Co. analyst Youseff Squali estimates that last year the Kindle accounted for about 2.5 percent of Amazon's incremental revenue growth and 2 percent of total revenue; this year he is estimating that it will account for 5-6 percent of incremental revenue growth and 4 percent of revenue.

While an impressive upstart business in its own right, the Kindle is still a drop in the bucket on $7 billion in sales. Any noticeable slowdown in that contribution may be just enough to take the edge off the Kindle glow, which I would argue began to shine in all its glory last October 23, when Amazon’s stock leaped 27 percent in a single day.

That’s the day after Amazon reported third quarter financial results, which were strong. It’s also the day after Amazon said that the Kindle had become its No. 1 product in units and sales across all of its categories—not just electronics.

It’s impossible to quantify the Apple iPad’s impact, but this much is clear: It would be absurd to think the iPad isn’t having a significant impact, even with iPad users downloading books via a Kindle app.

The first real shootout in the e-reader corral will occur this weekend, with the Father’s Day duel. (Amazon is offering free one-day shipping on Kindles orders received by 7:30pm ET tonight.) Then comes back-to-school. Then Christmas.

Beyond the Kindle, Amazon has executed superbly as a retailer and it has quickly become an under-appreciated leader in enterprise cloud computing. (Disclosure: I’m a satisfied customer.) And according to Cash Flow Analytics, its trailing four months reported free cash margin— the percentage of revenue from core operations that results in reported free cash flow—was up 67 percent from a year earlier.

More importantly, according to Cash Flow Analytics, its sustainable operating cash flow—cash flow after interest charges and income taxes that is derived from renewable sources and supported by profitable operations—is up 112 percent for the trailing 12 months.

Among the headwinds, however, are foreign exchange rates. With 45 percent of Amazon’s revenues coming from overseas, Squali said in a report several weeks that he believes foreign exchange is “likely to remain an overhang on the growth outlook.”

He also believes Amazon may have no choice but to cut (yet again) the price of the Kindle. While that may help reignite demand, or keep the Kindle from entirely flaming out, reality is that Wall Street likes a good story and the Kindle was just that.

But he also notes that it took Amazon two years to to generate two million in Kindle sales; it took Apple less than six months to sell two million iPads.

Barring tremendous performance from Amazon, let’s just say any indication that the Kindle is no longer the story won’t likely help the stock.

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