The success of Amazon.com’s (NASDAQ:AMZN) Kindle eReader has been widely publicized and Barnes & Noble (NYSE:BKS) is tired of losing sales to them. Barnes & Noble announced a partnership to provide a e-bookstore for Plastic Logic, who makes a much anticipated eReader to compete with the Kindle. Tuesday, Plastic Logic announced that their device, which will be available in 2010, will carry the AT&T (NYSE:T) network for web connections and will also be able to connect to WiFi. No word yet on whether that will be a free option or if users will incur a charge. The e-book store will make more than 700,000 titles available, which includes a vast amount Google’s (NASDAQ:GOOG) public domain book titles which will be available to download for free. This places it well ahead of the Kindle’s 250,000 books available, but the Kindle has a head start on getting both the device and the e-bookstore in front of consumers much sooner.
The Barnes & Noble e-bookstore, while strategically partnering with Plastic Logic, will not be confined to just one device. The idea is that Barnes & Noble wants to provide reading material to a myriad of devices including Blackberries, iPhones, laptops, netbooks, etc. At this point, the Kindle is the only place where Amazon has made their e-bookstore available, although they have been toying around with making it available on Apple’s (NASDAQ:AAPL) iPhone.
It will be interesting to see how this new digital strategy works for Barnes & Noble, who signaled a shift in strategy from its traditional bricks and mortar store when it purchased Fictionwise last March for $15.7 million. The e-book market is growing rapidly with some estimates of this nascent industry claiming it already has up to $100 million in sales this year. Barnes & Noble will be joining Amazon’s and Sony’s (NYSE:SNE) already established e-bookstores but the industry is certainly young enough that BKS could easily stake a claim in the burgeoning market.
At current price levels we have Barnes & Noble as slightly Undervalued, even though sales have stalled at their bricks and mortar stores, the price has declined far enough to peek our interest. The company has continued to increase its dividend payout over the years and now the stock yields 4.6%. Although it is Undervalued by our fundamental methodology, there are still serious concerns that make us less optimistic about Barnes & Noble’s digital strategy.
One key issue that made us wary of this stock is still Amazon, both through e-books and web sales of books, they are grabbing an ever greater market share of overall sales. This move by BKS does not guarantee success in e-books but it at least gives the stock some growth potential. BKS might want to consider focusing a substantial amount of effort grabbing a niche in e-books, perhaps becoming the preferred outlet for text books. Barnes & Noble hopes that it has the ‘Kindle Killer” in store for 2010 with the Plastic Logic device, but as we have seen with so many supposed iPhone/iPod killers, that can be harder than it looks. Barnes & Noble has attracted some interesting partnerships to take on the challenge in Plastic Logic, Google, and AT&T. However, the fact that the Kindle was the first on the e-book scene will be a major challenge for late comers, and retailers like Barnes & Noble have few options but to adapt to a changing market.