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Microsoft Corporation (MSFT), Amazon.com, Inc. (AMZN): Barnes & Noble, Inc. (BKS)’s End Could be Near

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Bookseller Barnes & Noble, Inc. (NYSE:BKS) reported yet another terrible quarter on Tuesday. The company lost money, revenue fell, and comparable store sales declined. Even worse, the company’s founder and chairman announced that he would abandon his efforts to purchase the firm’s retail operation.

Barnes & Noble, Inc. (NYSE:BKS) shares are now down more than 30% in the last three months. At these depressed levels, is it worth an investment?

Barnes & Noble, Inc. (NYSE:BKS)

Barnes & Noble’s streak of disappointment continues

For two quarters now, Barnes & Noble, Inc. (NYSE:BKS) has been losing money. In June, it reported an EBITDA loss of $122 million, and then followed that up with an EBITDA loss of nearly $9 million on Tuesday.

At the same time, revenue and comparable store sales have been in decline. Consolidated revenue dropped 8.5% last quarter, after falling 7.4% in the quarter before that. Comparable store sales fell 8.8% in the fourth quarter of last year, and 9.1% in the most recent quarter.

Barnes & Noble, Inc. (NYSE:BKS) has blamed its failings mostly on two factors. The first is the continued struggle of its NOOK division. The NOOK cost Barnes & Noble $177 million in the fourth quarter of last year, and $55 million in the most recent quarter.

There’s been some evidence to suggest that Barnes & Noble, Inc. (NYSE:BKS) was planning to exit the NOOK business altogether. It recently put out a software update that allowed NOOK devices to access the Google Play Android app store, and has been aggressively discounting NOOK hardware.

But Barnes & Noble reaffirmed its commitment to the NOOK on Tuesday, announcing that it intends to release new NOOK products later this year.

The second issue for the bookseller has been, quite literally, a lack of good books. The Hunger Games and 50 Shades of Grey amounted to a windfall for the bookseller last year, one that has not been repeated.

WIll Microsoft buy NOOK?

Barnes & Noble now has a market cap of about $870 million. That’s less than the rumored $1 billion that Microsoft Corporation (NASDAQ:MSFT) was reportedly going to offer for the NOOK business earlier this year. In April 2012, the Windows-maker invested $300 million into NOOK for a 17.6% stake. Last May, TechCrunch reported that Microsoft Corporation (NASDAQ:MSFT) considered offering $1 billion for the rest of the division.

It would make sense. After investing $300 million, another $1 billion is not a significant amount of money. Particularly for Microsoft Corporation (NASDAQ:MSFT), given that it’s sitting on almost $80 billion in cash.

Strategically, Microsoft Corporation (NASDAQ:MSFT) could benefit from owning NOOK. It wouldn’t need the NOOK hardware, but it could definitely use NOOK’s online book store. Both Google and Apple sell digital books as part of their respective mobile ecosystems. By buying the NOOK business, and incorporating it into Windows 8, Microsoft would put the Windows ecosystem on equal footing with Google and Apple.

If Microsoft Corporation (NASDAQ:MSFT) did pay $1 billion for NOOK, shares of Barnes & Noble would surge. Yet, the TechCrunch report was back in May, a quarter ago. With no definitive proof of a forthcoming offer, playing that angle could be risky.

Amazon is doubling down on hardware

And if Microsoft doesn’t buy the division, the future of the NOOK seems particularly bleak.

Amazon.com, Inc. (NASDAQ:AMZN)‘s Kindle lineup has outsold the NOOK, and investors shouldn’t expect that to change. Various reports in recent months have indicated that Amazon is preparing to double down on its hardware strategy, expanding the Kindle lineup and getting into new devices.

As I’ve written before, investors should expect the Internet retailer to announce new Kindle and Kindle Fires next month, as well a streaming media player, a video game console, and (potentially) a smartphone. Without seeing these new devices, it’s difficult to judge their likelihood of success. However, it’s clear that Amazon.com, Inc. (NASDAQ:AMZN) remains very committed to its hardware ecosystem.

And that doesn’t bode well for Barnes & Noble’s NOOK. Competing with the $130 billion Internet behemoth is tough for any company; but for Barnes & Noble it’s especially difficult, as Amazon.com, Inc. (NASDAQ:AMZN) can afford to heavily advertise its Kindles and sell them at cost.

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