As one of the few people who still likes to read actual books, I love Barnes & Noble, Inc. (NYSE:BKS) as a company. Since the demise of Borders, Barnes & Noble, Inc. (NYSE:BKS) has truly established itself as the dominant bookstore operator in the United States. As an investment, however, I have my reservations.
Barnes & Noble: Today
We all know that Barnes & Noble, Inc. (NYSE:BKS) was the king of booksellers before books went electronic, and everyone had an e-reader, tablet, or smartphone that enabled them to read whatever they want without leaving home. As investors, however, we are much more interested in the current state of the company.
Currently, Barnes & Noble, Inc. (NYSE:BKS) operates over 1,300 bookstores, which include their 650 college bookstores as well, which I think are the last remaining bright spots in this company. The company derives the majority (62%) of its revenues from their retail segment, which consists of their traditional bookstores. B&N College makes up an additional 24%, and is growing each year. Surprisingly, the NOOK division only makes up 13% of the company’s revenues.
NOOK: Losing the battle?
While it is no big revelation that Amazon.com, Inc. (NASDAQ:AMZN) is winning the e-reader war with their Kindle, I am still disappointed at just how little of the market share that the NOOK has been able to capture. With the backing of Microsoft Corporation (NASDAQ:MSFT), I honestly thought that NOOK was going to reinvent itself and steal at least some of Kindle’s customer base.
Between 2011 and the end of 2012, Amazon.com, Inc. (NASDAQ:AMZN)’s market share of the e-reader sector rose from 47% to 55% of the entire market, including the basic Kindle and the Fire models. During the same time period, NOOK’s share held steady at 14% of the market. iPad held 12% of the e-reading market, with the rest dominated by PC reading software (a large portion of which is Kindle for PC).
Exiting the e-reader business, maybe
Microsoft Corporation (NASDAQ:MSFT), by the way, is reportedly considering purchasing the remaining NOOK assets for $1 billion, which would be a pretty good deal for Barnes & Noble, Inc. (NYSE:BKS) customers, and is one of the reasons that shares are up more than 15% this month alone. The company’s entire market cap is just over $1.3 billion, so this deal would effectively be valuing the rest of Barnes & Noble, Inc. (NYSE:BKS)’s business at just over $300 million, even after the recent gains.
I have mixed feelings about this. Sure, it would be a good payday for current Barnes & Noble, Inc. (NYSE:BKS) shareholders, but then what? Thinking long-term, what viable growth would Barnes & Noble be left with if it exited the digital business entirely? I do believe that there will always be some place in the market for physical bookstores, but there is much more downsizing to come in this industry.
The college bookstore segment will continue to grow, but it is just a matter of time before that market shifts to a mostly online environment as well. It already has somewhat with the concept of “renting” books, which is much cheaper through online sources and didn’t exist when I was in college about ten years ago.
Final Thoughts
Although sales have increased in recent years, the company’s business model is simply not profitable on any sustainable basis. Aside from the possibility of a nice payday if and when Microsoft Corporation (NASDAQ:MSFT) acquires the NOOK business, there is really no reason to own a stock that is projected to have losses totaling over $4.00 per share over the next three fiscal years, with no turnaround in sight.
The article Fighting a Losing Battle… originally appeared on Fool.com.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com and Microsoft. Matthew is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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