A Valuation Puzzle: Barnes and Noble’s Digital Business is Worth Twice as Much as Barnes & Noble —Wall Street Journal

Barnes & Noble’s Missing $500 Million; A Discrepancy Between Physical and Digital Property Values

Tom Gara reports at The Wall Street Journal Corporate Intelligence blog that “UK-based publisher Pearson bought into Barnes & Noble’s Nook Media digital business today [12/28/12], buying a 5% stake in the e-book company for $89.5 million and valuing the whole business at just under $1.8 billion.

That valuation is notable because it is about twice as much as what the market thinks Barnes & Noble itself is worth, with its current market cap of just under $900 million. Even Barnes & Noble’s own 78.2% stake in Nook is worth $1.4 billion based on today’s valuation from Pearson — about half a billion dollars more than investors value all of Barnes & Noble.

Some analysts think the company is simply very undervalued. From Andrea Cheng at MarketWatch:

Given the latest Nook Media valuation, that values Barnes & Noble at $2.4 billion, including $1 billion for the company’s bookstore-retail business, according to Janney Capital’s analyst David Strasser. Excluding the long-term debt and including adjusted cash, the analyst said Barnes & Noble’s valuation is about $2.5 billion—more than double the company’s current market capitalization.

But the low share price isn’t an accident. The company’s sales of digital books, magazines and newspapers are growing fast at the same time physical sales are declining, but investors have still been skeptical of valuing the company aggressively. That’s because Nook business still loses money, thanks to heavy investments in marketing and product development, and it faces up against the ferociously competitive Amazon in the e-book market, with Apple and Google also pushing into the game.

For the time being, the market is assigning a conservative valuation to the physical business and taking a wait-and-see approach to the digital business, hence the massive gap between what Pearson thinks Nook is worth, and what the stock market thinks its biggest shareholder is worth.

The value could change soon, explains Gara.  

And Pearson seems determined to shift its focus towards education generally. 

Find out more. 

A Big Value Gap Arises Between Physical and Digital Properties