Barnes & Noble, Inc. (NYSE:BKS) reported a 94.2% decline in earnings before interest, tax, depreciation, and amortization. Meanwhile, the stock rallied in the Wednesday trading session by 4.3%. How can a stock rally after the company reported a 94% decline in earnings year-over-year? But, believe it or not, there are a lot of positives when it comes to investing into the company.
The company is planning on spinning off its Nook segment. Well not exactly spin-off, but develop partnership agreements whereby a company would be taking on all of the risks, and costs, of operating a tablet business. What Barnes & Noble, Inc. (NYSE:BKS) will supply is distribution of the tablet device in its stores, certain software features like the Barnes & Noble, Inc. (NYSE:BKS) reader app, and the Nook brand. This will lower the amount of money lost from the Nook business segment. The company reduced its Nook-segment-related spending by 34%.
The company reported a 5.9% decline in revenue year-over-year because there weren’t any blockbuster book hits that could replace the Hunger Games and Fifty Shades of Grey. On the other hand, it was able to grow revenue in its college segment by 10.7%. The college segment is going to be the company’s fastest-growing business segment.
Going forward, the Nook will lose the company less money. Barnes & Noble, Inc. (NYSE:BKS) will continue to close losing retail stores and will continue to grow its college-book campus business. Analysts on a consensus basis anticipate earnings to grow by 61.9% in the current fiscal year, which will have to be driven by falling costs.
Microsoft Corporation (NASDAQ:MSFT) the potential partnership contender
Microsoft Corporation (NASDAQ:MSFT) could be the potential contender for partnership. The company was hoping to buy out the Nook business for $1 billion. But the next best alternative is to take on the risk of developing, marketing and selling Nook devices.
The Nook has an established market presence, and all it really needs is broader distribution. The technological sophistication of Microsoft Corporation (NASDAQ:MSFT) and its success in consumer electronics clearly demonstrates that the company could turn the Nook into a more successful business.
Source: Statista
The Barnes & Noble, Inc. (NYSE:BKS) Nook HD commands 8% market share. Going forward Barnes & Noble is hoping to collect revenue from media sales. If that is the case, then its partnership with Microsoft could be lucrative. Microsoft will get a device that has an established market presence and distribution channel.
Whether Microsoft buys out the Nook business or partners with Barnes & Noble, Inc. (NYSE:BKS), Microsoft will need to transition it from being a niche into a mainstream device that can be sold internationally. If it becomes a mainstream device that generates considerable profit margins, the company could earn a substantial amount of profit going forward.
Other investment alternatives
Amazon.com, Inc. (NASDAQ:AMZN) could be a compelling investment alternative. While the traditional book business is in decline, the digital format is certainly taking off. Amazon.com, Inc. (NASDAQ:AMZN) offers writers the opportunity to self-publish through Kindle Direct Publishing. Self-published authors earn a 70% royalty. It is efforts like these that put Amazon a little ahead of traditional media formats like Barnes & Noble.
The company’s growth isn’t isolated to product ideas like the Kindle Direct Publishing platform. It is most dominant in its core business of retail and cloud-virtualization services. Amazon in its most recent quarter was able to grow retail revenue in North America by 26% year-over-year. The company followed that success with 64% year-over-year growth in its Amazon web services (cloud).
Amazon is projected to grow its earnings by 37.1% per year over the next five years. The stock trades at a bit of a hefty valuation, but is reasonable when considering the historical and outward looking growth of the stock.
Conclusion
Barnes & Noble is a value investment that could be a little difficult for investors to wrap their minds around. For now, what’s pushing the stock price higher is falling costs related to the Nook, and the continued success of its college book campus business. Microsoft will either partner up with Barnes & Noble or buyout the Nook division altogether.
Amazon has been able to grow earnings historically and is projected to grow earnings exponentially over the next five years. Growth investors are likely to outperform the market with this investment.
The article Barnes & Noble Turnaround? originally appeared on Fool.com.
Alexander Cho has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft. Alexander 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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