Looking back over history of the business landscape in any sector, the market continually changes. Companies need to continually grow their corporate earnings to stay alive and proper. Innovation needs to be consistently made with the ultimate goal of exceeding customer requirements. Corporate earnings growth is generated by exceeding these expectations of the people who matter most—the customers.
One sector that has embraced innovation as a core belief is technology stocks. A great example in the last 20 years has been Apple Inc. (NASDAQ/AAPL). Apple has continually developed new products and innovations and this demand by customers for their products has driven corporate earnings. The firm stands out as one of the leaders of all technology stocks.
On the opposite end of innovation is Barnes & Noble, Inc. (NYSE/BKS). The traditional book seller has faced the brunt of innovation by technology stocks with extreme levels of competition. The move to online purchases of books and other products by giants like Amazon.com, Inc. (NASDAQ/AMZN) has put extreme pressure on the corporate earnings for Barnes & Noble and other traditional retailers.
While most people don’t consider Barnes & Noble one of the technology stocks, it has no choice but to become one. Technology stocks have been moving into its retail marketplace. Unfortunately, I don’t see Barnes & Noble as having a shot against other technology stocks like Amazon.com. As much as I like the traditional book store, the heavy level of competition by technology stocks will remain a massive headwind for the corporate earnings of Barnes & Noble.
Recent news of antitrust settlements between book publishers and the U.S. government has placed a bull’s eye on Barnes & Noble’s back. In this environment, Amazon.com looks to gain an edge against traditional retailers like Barnes & Noble whose corporate earnings will be severely hit. This settlement is related to the fact that its new book prices used to be set by the actual publishers, allowing traditional book re-sellers the ability to compete on an equal price point against online technology stocks, who would be willing and able to sell for less. In this settlement, retailers are now able to set pricing in a more flexible manner allowing for more aggressive pricing. This is exactly the edge that technology stocks, like Amazon.com, have over traditional retailers.
The real problem for a firm like Barnes & Noble is that technology stocks like Amazon.com have a diversified amount of business that allows them to sell books at essentially no profit and perhaps even a slight loss to gain market share. Technology stocks are adopting an old marketing trick: the idea of a “loss leader” to drive traffic to their other goods where they can make up the profit margins. This has driven corporate earnings growth over the years and, while margins are relatively low for Amazon.com, the overall size of revenue is huge. Amazon.com can essentially sell e-books at a loss just to drive traffic. Technology stocks know and understand the value of eyeballs.
The question is: would I invest in Barnes & Noble? At this point, I see a future of declining corporate earnings, declining revenue, heavy competition and no end in sight to any of these fundamental drivers. The advantage that technology stocks have in this new environment is the ability to cross-market products and drive corporate earnings through various goods.
While I do lament the demise of the traditional book retailer, as I am a fan of books in general, one cannot invest on sentiment alone. For my own money, I would stay away from Barnes & Noble unless it can prove to be a competent fighter against technology stocks like Amazon.com and I see a sustained move up in their corporate earnings. While it appears “cheap,” the stock could certainly get cheaper. A month ago, when people said that coal stocks were cheap, I wrote the article Coal Stocks: Don’t Try to Catch This Falling Knife; the stock I mentioned has fallen almost 19% since that time. I don’t believe in gambling with my money and, at this point, Barnes & Noble is a “show me” stock.
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