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A Technology Company? Barnes & Noble (BKS) may be the stock market's cheapest technology stock with a price/sales of 0.08 and a PEG ratio of 0.59. Sure, the company has a dominant presence as a brick and mortar bookstore chain, but the company's surprisingly successful Nook e-reader/tablet gives it tremendous upside potential. JP Morgan estimates that there will be 47.9 million tablets sold in 2011 and 79.6 million sold in 2012. As the market's lowest cost tablet, the color Nook could be worth billions to the right acquirer.

Between the stable cash flow from its underlying bookstore business and growth from the Nook, Barnes & Noble is becoming a technology company in the same mode as its competitor, Amazon.com (AMZN). We are not the only ones to take notice. As we mentioned in Is Something Brewing at Barnes & Noble? there was a massive surge in options trading volume as a percentage of previous opening interest.

THE CHEAPEST ANDROID TABLET

The color Nook is quickly gaining a reputation as the industry's cheapest Android tablet. Popular retailers like Home Shopping Network are selling the color Nook as a tablet capable of showing Adobe Flash videos, movies and email. At $249, this is the market's cheapest Android tablet. It not only offers serious implications for the rest of the tablet market, it could effectively undercut the Amazon Kindle's popularity. The Nook already had a 25% market share of the ebook market as of the last earnings release. With this color Nook, it's possible that Barnes & Noble could edge out Amazon.com as the dominant player in the market. We are not alone. The Wall Street Journal apparently already agrees that the color Nook could be a hidden gem.

BRICK AND MORTAR BOOK BUSINESS IS FADING, BUT NOT DEAD
Sales at Barnes & Noble's core bookstore business is fading, but it is by no means dead. As we discussed in Bullish News From Barnes & Noble? in its most recent earnings release, the company reported quarterly sales increase 7% and same store sales growth of 7.3%. Between 2004, and 2010, store sales have been stable. In 2004, the 647 Barnes & Noble stores averaged $5.9 million in sales. In 2010, this figure jumped to $6.0 million in part because of sales of the Nook.

POTENTIAL MERGERS
The key here is that Barnes & Noble should be viewed as a low cost way to enter the tablet market. While we continue to believe that the tablets are a bridge technology, they could still offer the right acquirer meaningful synergies and growth potential.

Sears Holding (SHLD) - We have discussed the possible benefits in Will Eddie Lampert's Next Big Purchase be in Retail? While Sears won't be able to fully leverage technological synergies, we think Lampert could see the tremendous upside in the color Nook and be confident enough in his ability to right size real estate to take a chance on the bookstore chain.

Microsoft (MSFT) - It is a very unlikely acquirer because of Microsoft's commitment to the Windows operating systems. It might not be totally out of the question. While we think the company is better off leveraging off of the Best Buy stores to create Microsoft stores, the Barnes & Noble store leases could also provide moderately priced lease opportunities.

Amazon.com (AMZN) - It is also an unlikely candidate because of its existing Kindle platform. While it could make sense for Amazon to purchase Barnes & Noble to eliminate a dangerous competitor at a low cost, a sale would have to exclude the brick and mortar stores since they could jeopardize Amazon.com's increasingly fragile tax advantage.

Nokia Corp (NOK) - The world's largest manufacturer of mobile phones is currently in a transition as it slowly moves away from its proprietary Symbian based phones toward Windows based phones. While there is zero chance of Nokia purchasing the entire bookstore company, it could see value in the Nook. With $16 billion in excess liquidity, paying around $1 billion may seem like a reasonable price for a potential stranglehold on the low cost tablet market as a hedge against the success of the windows based smart phone venture.

Google Inc (GOOG) - We think Google is a likely acquirer that could benefit substantially from the acquisition of the color Nook. As a low cost Android device, Google could view this as an important way to put a stamp on the tablet market. It could even further distinguish itself by using its advertising expertise to make the color Nook free when bundled with targeted advertising. In addition, for such an ambitious firm, there's likely some envy over Apple's (AAPL) popular stores. This is a true long shot, but Google could use Barnes & Noble's stores to selectively highlight Android products.

Borders Group, Inc (OTC:BGPIQ) - While Borders was hurt by the transition toward electronic books, the company was also pushed into bankruptcy because of long dated undesirable leases. As part of its reorganization, Borders will close 30% of the stores and jettison its most unprofitable leases. Bill Ackman of Pershing Square, who is a large Borders shareholder, had offered to finance a $16 per share buyout of Barnes & Noble in December 2010. This merger could make sense, but longer term, it would do nothing to help the bookstore chains transition into a post ebook/tablet world.

Disclosure: I am long BKS. and may initiate a long position in GOOG, MSFT, SHLD over the next 72 hours.

Source: Barnes & Noble Is the Market's Cheapest Technology Stock