Is Barnes & Noble a Buy as the Tablet Market Grows Increasingly Competitive?

With shares of Barnes & Noble (NYSE:BKS) now trading just below $16, is BKS a BUY, a WAIT and SEE, or a STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

Nook HD+C = Catalyst for the Stock’s Movement:

As the market to secure digital content becomes increasingly competitive, analysts have predicted that Barnes & Noble will be left behind by its rivals, Amazon (NASDAQ:AMZN) and Apple (NASDAQ:AAPL). Even Netflix (NASDAQ:NFLX) has had problems signing licensing agreements with providers. In early September, after Netflix’s own exclusive deal with Epix ended on the first of the month, Amazon announced a similar deal with the Viacom-owned (NASDAQ:VIAB) content provider that owns the rights to Paramount Pictures, Metro-Goldwyn-Mayer, and Lionsgate films.

In late September, Seeking Alpha maintained that neither of Barnes & Noble two businesses will be profitable in the long-term; its sales of physical books are declining as digital content becomes more popular, and the company’s e-reader does not have a competitive advantage over its peers. While the publication did note that Barnes & Noble currently has a 30 percent share in the e-book market, compared to Amazon’s 22 percent, an e-reader cannot match the functionality of a tablet. In that market, sales are expected to double this year, according to the research firm Gartner. Furthermore, a recent survey by the Pew Research Center showed that the use of e-readers is declining in America; of those Americans over the age 30 who read e-books, less than half use e-readers.

In particular, Seeking Alpha looked to the specifications of the device and its associated service as a point of comparison. In the publication’s opinion, the Nook, with its $199-to-$299 price tag and newly begun streaming and downloading services, is a far distant fourth in the competition between Amazon’s Kindle, Google’s (NASDAQ:GOOG) Nexus, and Apple’s iPad. Amazon has a much bigger library of content and more funds to devote to increasing it, and the iPad is the most popular tablet on the market, accounting for 70 percent of all devices sold, according to HIS iSuppli.

However a report in the Wall Street Journal indicated otherwise. Barnes & Noble’s retail book sales are not as bad as Seeking Alpha suggested. According to the Journal, the business is growing and profitable, and the Nook is holding its own against Amazon and Apple.

At an investor presentation in October, Barnes & Noble’s Chief Executive Officer William Lynch outlined the “bull case,” arguing that the company was “undervalued.” The bookseller dominates that market; after Borders went out of business the company increased its market share by 64 percent. In the presentation, Lynch also predicted that physical books will not go “away anytime soon.”

On August 31, the company released its fiscal first quarter results. For the three month period, the company’s reported that revenue had increased 2.5 percent from the year-ago quarter to $1.5 billion, consolidated net loss declined 28 percent, and digital content sales grew 46 percent. In comparison, Nook sales remained flat year-over-year, at $192 million.

Barnes & Noble has its supporters. The chairman of Liberty Media (NASDAQ:LMCA), John Malone, bought $200 million of preferred stock, and Microsoft (NASDAQ:MSFT) invested $300 million in Nook Media in exchange for a 17.6 percent stake in the company.

Nook Media, a newly formed division of the company, includes Nook and the company’s profitable college division, which operates bookstores at 667 campuses across the company, including Yale University and Boston University. On October 4, the company announced its partnership with Microsoft in a press release.

“As demand for digital content continues to increase, we are focused on bringing ground-breaking reading and learning content and technologies to more people in more formats than ever before, including the imminent launch of our exceptional NOOK reading application for Windows 8,” said William Lynch, CEO of Barnes & Noble.

Following the launch of Amazon’s new Kindles and Apple’s iPad, Barnes & Nobles debuted two color Nook tablets, the 7-inch Nook HD and the 9-inch Nook HD+, in late September. According to the Huffington Post, the devices offer “better screens, lighter weights, and a better reading and shopping experience” than the Kindle. To supplement the new tablets, which will be available this month, the company has added digital content with Nook Video, a service that allows customers to stream and download movies and television shows for a fee to televisions and mobile devices. Nook Video has made deals with Disney, Viacom, and Warner Brothers to provide shows like HBO’s “Game of Thrones” and movies like “The Artist.”

But the bear case remains. The Wall Street Journal contends that there is a possibility that Barnes & Noble’s retail business will ultimately erode, and that the company will be too small to compete against Amazon, Apple, and other tablet makers.

However, for the moment, Barnes & Noble has begun to look like an overlooked stock. While it has been beaten down by concerns that Amazon will drive its margins to zero, the company sells for close to what its retail business is worth alone. Furthermore, new Nook devices have received good reviews. Because of this, and the key metrics above Barnes & Nobles looks like a Wait And See.

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