Amazon.com Inc shares climbed more than 4 percent on Tuesday after an analyst note fueled optimism about the company's Kindle e-book business.
The e-book market is a lot bigger than previously thought, and owners of Kindle e-readers and tablets are reading more e-books, Morgan Stanley's Scott Devitt, a leading Internet and e-commerce analyst, told investors in the research note.
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Devitt estimated worldwide e-book unit sales of 859 million in 2012, up considerably from a previous estimate of 567 million. With almost 45 percent of the e-book market, Amazon likely sold 383 million e-books last year, compared with an earlier estimate of 252 million, the analyst added.
Amazon's broader strategy is to sell mobile devices at or near cost and make money when consumers use the gadgets to buy digital content, including e-books, music, videos, apps and games.
Devitt said on Wednesday that the strategy may be working with e-books, one of Amazon's oldest digital categories.
"We initially assumed that early adopters of eReader devices would be avid readers and, therefore, the marginal buyer would read less," Devitt wrote.
However, data from a recent Amazon presentation show that consumers who bought a Kindle in 2011 read 4.6 times more e-books, on average, in the 12 months following their gadget purchase, compared with the 12 months before getting the device, the analyst noted.
Similar data from 2008 show consumers reading e-books 2.6 times as much after their Kindle device purchase, on average, according to Devitt.
The success of Amazon's Kindle business is important because it is more profitable than some of the company's other operations, Devitt said.
The Kindle business, which includes the gadgets and related digital content sales, generated about 11 percent of Amazon's sales last year and 34 percent of the company's consolidated segment operating income, or CSOI, Devitt estimated. The CSOI is a closely watched measure of Amazon's profitability.
"The Kindle franchise is a profit pool that subsidizes investments in other growth initiatives," Devitt wrote.
Amazon shares rose 4.1 percent to $269.30 in afternoon trading on Wednesday.
(Reporting By Alistair Barr; editing by Gunna Dickson)