), Google (Nasdaq:
have emerged as the three most important players in the consumer
technology landscape. These companies are so good at what they do
(building deeply loyal customer bases and ever-rising revenue
streams) that they may not even notice that they have competitors
nipping at their heels.
Barnes & Noble (NYSE:
would like to finally take back some lost
from these technology leaders, but they may not even be on their
competitors' radar screens in a few quarters. Each is embarking on
a last-ditch, Hail Mary pass, and if they fail to connect with
consumers, it may be game, set and match. Looking at recent
short-selling activity, a growing chorus of investors is wagering
that both Barnes & Noble and Nokia are toast.
The Bezos Curse
Barnes & Noble's founder Len Riggio rues the day he first
came across a little company called Amazon.com back in the 1990s.
He quickly found out that Amazon's Jeff Bezos didn't play fair. He
has been committed to market share -- at all costs -- even when it
meant sacrificing near-term profits.
Fast forward to late 2011, and Barnes & Noble is again
trying to stave off the Amazon juggernaut. Its just-released
upgraded Nook e-reader, which retails for $249, is garnering a
series of high-profile mentions in media outlets such as the
Wall Street Journal
and CNBC. Reviewers have taken note that the Nook is a
well-developed product, leading Barnes & Noble's
William Lynch to boast last week at a Liberty Media conference that
the company will control 30% of the e-book
by 2015, which will be worth $7 billion by then. That helped to get
the stock going, and it really took off on November 10 when it was
Liberty Global (Nasdaq:
was looking at acquiring Barnes & Noble. ( Liberty looked at
buying Barnes & Noble earlier this year and took a pass,
instead making a $200 million investment in the book-seller.)
Short sellers, which had just finished building positions,
quickly realized that it might be wise cover their positions and
fight the battle another day. (The size of the collective short
position had increased 8.4% to 10.1 million
from the middle of October to the end of October, making this stock
the 11th-most heavily shorted stock on the
, in terms of percentage of the trading
But the short sellers are right to smell blood in the water. Simply
put, Barnes & Noble is playing a game it can't win. Amazon,
Apple and other tablet makers are better prepared to fight for
market share because they have much greater financial firepower.
Barnes & Noble sports
of nearly $300 million, while key rivals sport embarrassingly high
levels of net cash.
More to the point, Amazon's decision to build an ecosystem
around its $199 Kindle Fire, including loads of free content
included in the $79 annual Amazon Prime free shipping plan is a
very compelling value -- one that Barnes & Noble can't match.
Perhaps of greatest concern, it's hard to see how Barnes &
Noble will avoid losing money on Nook hardware sales as major
computer vendors such as
found it impossible to make money selling tablets that
retailed for $400 or $500. And as Goldman Sachs recently noted,
"The upcoming advertising necessitated by head-to-head launches may
drive further cost creep."
That's why investors need to give a close read to Barnes &
Noble's fiscal third quarter report, slated for the week after
Thanksgiving. Analysts expect the company to eke out a modest $0.02
after two straight money-losing quarters, but rising expenses may
make that impossible. More broadly, analysts expect Barnes &
Noble to finally return to profitability in the
that begins next May after two straight money-losing years. Don't
let the recent share price rebound fool you, Barnes & Noble may
be seeing sales move up on the heels of expanding Nook sales, but a
with low margins may make projections of a future profit impossible
Windows phones -- what's that?
In a world of Apple iPhones and Google-based Android phones,
it's easy to forget that
is still in this technology segment. Updated market shares that
reflect the October launch of the latest iPhone are hard to pin
down, but it looks as if the Android operating system is used on
more than 50% of all smartphones, while Apple's share may be around
20% (it was in the mid-teens of September as iPhone sales
temporarily slowed), Blackberry likely holds low-teens market
share, and Nokia's Symbian platform accounts for the remainder.
Notably, Nokia is phasing out Symbian to piggyback on
Microsoft's Windows 7 smartphone software. So its market share is
starting from almost nothing. Few realize it, but Windows 7 has
already been on the market since October 2010 without making any
sort of impact in the marketplace. Early reviews of the new Nokia
phones that run on Windows 7 have been favorable: Microsoft's
"Metro" interface is lively and appealing. But it's unclear how the
Microsoft/Nokia phones will ever boost market share levels with
such a long lag time in hitting a quickly-maturing market,
especially as both the Apple and Android platforms already have
tens of thousands of applications built for them.
That, in a nutshell, is the bet being made by short-sellers. The
short position rose from 85.5 million shares in mid-October to 103
million shares two weeks later, making Nokia the third most
heavily-shorted stock on the NYSE (after
Bank of America (NYSE:
Short-sellers may not have long to wait. Within a few months, it
will quickly become apparent whether the Nokia/Microsoft phones are
making a dent in terms of market share. As CEO Stephen Elop said at
an investment conference in Barcelona last week, "We want to see
volumes begin to move. We need to get developers recognizing there
is a growing opportunity here, so that we attract applications."
He's right. Whether that happens is an open question.
Risks to Consider:
If you short these stocks, you need to closely monitor sales
trends. Any real market share gains for the Nook or the Nokia
smartphone means you should think about covering your short
Action to Take -->
These companies are up against fierce rivals and would have
to expend a considerable amount of marketing and development
resources to stay relevant. Their relatively weak balance sheets
may make that impossible.
When Barnes & Noble's quarterly results are released near
the end of the month, you'll need to move quickly as a good or bad
set of numbers will likely move the stock sharply in one direction
or the other. Still, a 40% jump since early November implies that
expectations are quite high, and a downside move may be more likely
than an upside move from here. As for Nokia, it simply may be too
late in the game for the company to make any sort of dent in the
smartphone space. Either way, I wouldn't want to own either of
these stocks right now.
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.