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Much Ado About Books: barnesandnoble.com's IPO Vs. Amazon.com

Here's the Cliff Notes version on barnesandnoble.com's planned IPO: see Amazon go, see Amazon play, see Amazon run. Be like Amazon. But can barnesandnoble.com write its way into the record books as its stronger Web-based rival has? Wall Street has never valued an imitator as much as an innovator.

That's not stopping Barnes' Web division, launched in March, from trying to raise as much as $100 million in a public offering. While that may seem like a lot, it's still just one-third of Amazon's working capital.

barnesandnoble.com parent firm Barnes & Noble, the world's largest bookselling chain, also plans on kicking in $100 million to the spun-off Web division just prior to the IPO, bringing BN's Website working cap to about $200 million.

For the 26 weeks ending August 31, BN's Web site generated $21.87 million sales. Amazon posted $115.97 million sales for the June quarter or more than 5x BN's sales in half the time. On a quarter basis, the BN Web site had just $12.5 million sales for its second quarter ending July 31.

Amazon.com

BarnesandNoble.com

Latest Q sales

$ 116.0

$ 12.5

Net loss

$ (21.2)

$ (13.6)

Annualized

$ 463.9

$ 50.0

1999 sales estimates

$ 650.0

$ 85.0

Barnes' IPO filing doesn't say how many shares it will offer or at what price, but rumor has a 20% spin off in the works.

AMZN's market cap is north of $5.7 billion or about 12x annualized sales. On a similar multiple barnesandnoble.com would fetch $600 million.

While investors may want to value BarnesandNoble.com at an Amazon-like valuation, we estimate barnesandnoble.com may fetch $400 million on IPO cap with a little leg room on its first day.

Parent firm Barnes & Noble's (NYSE:BKS) market cap on September 28 was $1.96 billion. If we discount out the spin-off, as Wall Street seems to already have done with BKS shares, the net result may be an overall $2.5 billion valuation for the two entities combined.

BKS shares peaked at $48 per share during the past 52-weeks and at $28.563 per share September 28, as BKS traded 21% above its 52-week low.

The big plot twist: can barnesandnoble.com ever catch Amazon.com? Perhaps over many years and if the senior management at Amazon, including founder Jeff Bezos, all stopped working at maintaining its retail leadership status, which is not going to happen.

At a recent Internet World investment conference Jeff was our guest speaker. He said that when he first decided to go into the Web business he compiled a list of 25 possible areas and he settled on books. We all know books are a thin margin business, so now Amazon adds music and video. All thin margins, but ones where volume rules, massive volume, the kind Amazon approaches with books but may take 12 to 24 months to build up in music and video.

So Amazon has a lead in three areas vs. barnesandnoble.com. Both must fight off rivals in music and video that have established themselves and bought real estate on the very same Web sites that these two have for books, specifically CDnow (NASDAQ:CDNW) and N2K (NASDAQ:NTKI). Amazon's biggest book pal is Yahoo, while barnesandnoble.com has a four-year deal with AOL as its exclusive bookseller.

Over time does the barnesandnoble.com IPO have a happy ending? We see it becoming more valuable than parent Barnes & Noble shares. But it may cost BKS in some valuation as the digital side battles the analog side for attention. The scale of the Web side of the equation highlights the Internet advantages of marketing and distribution to being land-based.

Already in the works by barnesandnoble.com are downloadable books. When that happens in a friendly, portable, clear, easy user format, then barnesandnoble.com may leave Barnes & Noble far behind. As the story goes perhaps it's not barnesandnoble.com vs. Amazon but barnesandnoble "dot.com" vs. Barnes & Noble, the "undot.com," two sides of a well-established company that's undergoing a revolutionary shift from land to Web.


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