There’s a new Nintendo (OTCMKTS:NTDOY) console. A new Xbox from Microsoft Corporation (NASDAQ:MSFT). A new Sony Corp (ADR) (NYSE:SNE) PlayStation. Meanwhile, Black Friday is right around the corner. On top of that, electronics retailer Best Buy Co Inc (NYSE:BBY) has gained over 28% since the start of the year, more than five times the broader market. Will these new releases keep Best Buy stock chugging higher?
Evercore ISI analyst Greg Melich doesn’t seem to think so. He just downgraded shares of BBY stock from “hold” to “sell.” He cites both company-specific and industry-wide trends.
Best Buy is competing against discounters and online retailers for market share. At the same time, gadget upgrades aren’t as big of a deal for consumers as they used to be.
I agree.
The Bear Case for BBY Stock
At first glance, Best Buy doesn’t seem particularly frothy despite its run. Shares are trading for 12 times estimated earnings vs. a long-term growth rate of 11%. That gap isn’t a red flag in itself. Meanwhile, the company has beat earnings estimates in each of the last four years, while its forward-looking earnings estimates continue chugging higher.
Oh, and Best Buy offers investors a solid 2.9% dividend yield despite the run-up.
Still, I am skeptical of Best Buy stock right now. While I want to believe the momentum can continue, I worry about the retail reality of steep discounting, which is seemingly a precursor to traffic these days. Already, the profit and operating margins for BBY are incredibly thin. Despite the projected earnings growth, no real sales growth is expected going forward.
Those aren’t the kinds of fundamentals I’m looking for in an investment right now — especially one without any true innovation and with perhaps the biggest gains already in the books.
This holiday season, expect a lot of chatter around the PS4 Pro, which offers VR and 4K compatibility. Expect similar ongoing chatter around the new-but-old Nintendo release and other VR gadgets. And expect broader chatter about the fact that online shopping is transforming retail. But don’t confuse this chatter with anything that will actually impact BBY stock.
For e-commerce, for example, The Motley Fool aptly summed it up: “Domestic online sales soared 24% for Best Buy in its latest quarter, rising to account for 10.6% of its stateside sales. However, those online transactions have come mostly at its own expense.”
Keep an eye on e-commerce and the forward-looking forecast when Best Buy reports earnings on Nov. 17. But until then, don’t hold your breath. I’m impressed by the run BBY stock has posted thus far, but I would like to see far more organic growth and far thicker margins before I consider purchasing shares of my own at this stage in the game.
Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.
