When Microsoft (NASDAQ:MSFT) agreed to invest $300 million in Barnes & Noble‘s (NYSE:BKS) e-book and college-bookstore business yesterday, Microsoft investors shrugged. Barnes & Noble’s stock, meanwhile, more than doubled right after the news hit, eventually “falling” to a 50% gain.

So which is it? Does Microsoft’s alliance with Barnes & Noble in digital books warrant a huge rally — or a gaping yawn?

The easy answer is that both reactions are correct: That this is a much bigger deal for ailing Barnes & Noble than it is for Microsoft. But a closer look at the terms of the deal suggest things aren’t that simple.

For Microsoft — a company with a $60 billion cash pile and a $270 billion market cap — $300 million is pocket change. For Barnes & Noble, which has seen its stock price fall from $46 per share in 2006 to $10 earlier this month, the move brings capital needed to compete with Amazon‘s (NASDAQ:AMZN) Kindle Fire and the Apple (NASDAQ:AAPL) iPad with its iBook reading app.

That much is clear on the surface, but there is more to the deal than that. After all, Microsoft’s money will be invested in increments: $60 million a year in the joint venture over three years, plus $25 million a year for R&D for five years. And while any app developer would love to have that kind of financial commitment, it hardly warrants a rise in Barnes & Noble’s market cap from $883 million to $1.8 billion — which is what Barnes & Noble was worth once more, for one brief moment this week.

That’s because much of that initial rally was triggered largely by a buying squeeze on a stock the shorts had clung to like flies on honey. As Barnes & Noble struggled to eke out profits in recent quarters, the short interest on the stock rose to 19 million this month from 6 million last August. The Microsoft alliance left many BKS shorts desperate to sell, driving the stock as high as $27.90 per share in pre-market trading.

By Monday’s close, the stock had drifted down to $20.75, which valued Barnes & Noble at $1.34 billion. And yet some of its investors felt Microsoft’s $300 million investment meant Barnes & Noble should be worth upward of $30 a share, or a market cap of $2.8 billion.

Barnes & Noble might be worth that much one day, but it’s going to take time and a lot of shrewd business to get there. The end result is far from certain, but here’s a couple scenarios:

Best-Case Scenario

Barnes & Noble is a company stuck in the past era of brick-and-mortar bookstores, an endangered species in the Kindle Era. But it has two assets that could help position it for moderate growth in the future: its Nook e-book reader software, and its access to the college-textbook market as it goes digital.

Let’s say Barnes & Noble’s 641 college bookstores make the company a big player, if not the leader, in digital textbooks — which are much cheaper than printed textbooks to publish in small numbers, and therefore poised for growth. It’s a niche market, but a fertile one. And let’s say that Windows 8 is so tablet-friendly that people love reading books on it, making it a viable rival to the Kindle.

In that best-case scenario, Microsoft would have to make $60 million a year for five years to make its investment profitable. Microsoft owns 17.5% of the new subsidiary (named Newco — that should give you some idea of how hastily this thing was thrown together). So it’s quite possible that Newco will need to make more than five times that much annually — or upward of $300 million a year — just to break even.

If that happens, Barnes & Noble could spin off Newco (or whatever it’s called by then, hopefully not that), and either liquidate its 700 non-college bookstores or sell them to a private equity firm. And Microsoft will have, for once, a comfortably profitable online business.

The Not-So-Sunny Scenario

Apple and Amazon continue to dominate tablets, and therefore e-readers. The Nook remains useful, but a marginal product. Barnes & Noble’s college bookstores do OK, but never give the company the foothold in digital textbooks it had hoped for.

In that case, the rally in Barnes & Noble’s stock this week will prove to be a temporary short squeeze. Its stock will sink, in time, to the single digits. Microsoft will have been shown to have overpaid for another digital property, although it can afford to. And both Microsoft and Barnes & Noble will continue to be outliers in markets they once dominated, and long to dominate again.

Which scenario do you see happening?

As much as I want to see several strong competitors in developing markets like digital books and tablet software, I don’t see anything in this deal that suggests Microsoft and Barnes & Noble can disrupt the dominance of Apple and Amazon in these areas. But this is one instance where I wouldn’t mind being proven wrong.

As of this writing, Kevin Kelleher did not hold a position in any of the aforementioned securities.