Amazon Upgraded on Kindle Prowess

Updated since 9:19am EST with analyst comment and stock price.

NEW YORK (TheStreet) -- Kindle's rise lifts Amazon(AMZN) to a buy rating at Collins Stewart.

After a 10% slide in the stock in the past month, Collins Stewart analyst Sandeep Aggarwal upgraded the stock to a buy, citing the Kindle's strength in the all-important e-book sector.

Aggarwal estimates that Amazon will sell 3.85 million Kindles this year, and if true, that would show a profit of $650 million on $2.5 billion in sales.

The e-reader sector is starting to heat up. Last month, Apple(AAPL) introduced its iPad tablet, last week Google(GOOG) was rumored to be entering the race with a "gPad"-friendly operating system and this week, Barnes and Noble(BKS) is restocked with its nook e-reader device.

Amazon bulls say Kindle's dominance among e-books, while challenged by upstarts, will likely continue as the category takes off with consumers.

Call it an iTunes-like effect. Aggarwal says most of Amazon's $649 average Kindle related sales will come from digital books, media subscriptions and accessories. "Kindle revenue is not limited to unit shipment," Aggarwal says. Amazon will sell about $400 in products beyond the $259 Kindle price, Aggarwal estimates.

It also won't hurt that the Kindle is likely to be upgraded with a color screen soon, says Aggarwal, noting that the device represents up to 8% of total Amazon sales.

Last week, The New York Times reported that Amazon had purchased touchscreen specialist Touchco, a move that presumably puts Kindle on track for more advanced display technology.

Amazon shares rose $2.29, or 2%, to $119.68 in early trading Monday.

--Written by Scott Moritz in New York

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