Liberty sets Barnes & Noble free: Now what?

Liberty Media has decided to put Barnes & Noble down. Should investors follow the smart money or read on?

The media company controlled by John Malone has sold 90 percent of its roughly 17 percent stake in the country's largest bookstore chain, a move that sent the shares down 13 percent in midday trade Thursday. While Liberty didn't make any specific complaints about the business, it was likely fed up with trying to compete with Amazon. Liberty and B&N declined to comment.

Since its founding in 1994, Amazon has offered deep discounts and convenient delivery on the vast majority of titles available at B&N. While B&N launched a successful website of its own, it's virtually impossible to outfox a competitor that faces little pressure to actually earn profits.

Read MoreLess Sirius is more for John Malone

Nook signage in a Barnes & Noble bookstore in New York.
Getty Images

Since investors view Amazon as a growth company, it has been able to get by with razor-thin operating margins to this day. B&N, meanwhile, falls at the opposite end of the investing spectrum, with many shareholders hoping to see steady cash flow.

When e-books appeared several years ago, B&N put up a strong showing with its Nook e-reader. But while B&N had a roughly 25 percent share of the e-book market at the end of 2011, that has since shrunk to about 20 percent, according to the company.

Once again, the main culprit was Amazon. Not only can Amazon undercut B&N on prices of digital books, it can pile a seemingly infinite amount of resources into its Kindle e-reader. Since e-book sales often follow device purchases, B&N has struggled to fight back.

It's tempting to think that a little more spare cash could solve B&N's woes. In May 2012, Microsoft piled $605 million into the Nook business, which at the time was showing impressive revenue growth.

Read MoreAmazon pricing-and valuation-to remain irrational

Indeed, some investors had hopes that the Nook business would be sold to investors who valued its growth prospects, even as it lost money. A rival e-reader company called Kobo, which probably had fewer users than Nook, was bought by Japan's Rakuten for $315 million in 2011. That deal was done at healthy 2.5 times trailing revenue, estimated Stifel Nicolaus analyst David Schick.

Such a deal looks less likely now. To the surprise of some, the U.S. e-book market has essentially stopped growing, with many consumers sticking to physical books. That partly explains the incredible 50 percent decline in Nook revenue in the three months through January.

All that said, Liberty's departure does create opportunity. Liberty's investment gave it certain blocking rights that could have prevented B&N from, say, spinning off the bookstore division. B&N Chairman Leonard Riggio, who owns about 26 percent of the company, may be interested in taking financial control of the bookstores he has overseen for many years.

Indeed, while physical book sales aren't likely to grow much, they generate plenty of cash. Even before excluding the losses from the Nook division, the company trades at a mere 3.8 times estimated earnings before interest, taxes, depreciation and amortization for the year through April, according to John Tinker, an analyst at Maxim Group.

And while the Nook has been a drag, its losses continue to narrow as the company slashes costs. That suggests the company's profits are likely to grow for some time.

With Amazon likely to remain king of the jungle, B&N is never going to be a thrilling story for investors. But for those with a little patience, there may be a happy ending.