Best Buy (NYSE:BBY) announced slightly lower same-store sales during the holiday season, and investors dumped BBY stock in a hurry.
The drop was minor, less than 1%. But it was unexpected, and missed analyst estimates of a top-line gain of 0.5%.
For the quarter, Best Buy reported earnings of $607 million ($1.91 per share) on revenue of $13.48 billion. This compared with earnings of just $479 million ($1.40) but revenue of $13.62 billion a year earlier. More importantly, while adjusted profits of $1.95 per share easily beat estimates of $1.67, revenues fell short of analysts’ expectations, also for $13.62 billion.
The revenue shortfall meant analysts threw Best Buy stock into the dumpster with retailers such as Macy’s Inc. (NYSE:M), with shares down almost 5% early Wednesday, to $42.40. During the Christmas season, on Dec. 8, the shares traded as high as $49.31.
Were the analysts right, or did they just offer smart investors a bargain? Is Amazon.com, Inc. (NASDAQ:AMZN) about to kill all retailers, or is this just a case of Moore’s Law in action?
Great Expectations for Best Buy
Best Buy even trounced the higher earnings whisper number of $1.66 per share. But actual estimates were all over the map, with some very bearish about the company’s ability to cut costs and others bullish on margins.
The Zacks Metric Model noted that BBY stock had beaten estimates for four quarters, and that shareholders had been rewarded with a 36% gain. In particular, Best Buy was posting big gains in online sales — the so-called “omni-channel” approach — and Zacks was expecting an upside surprise.
On the bottom line, of course, Best Buy delivered one. And considering the sizable beat, BBY shares should’ve rocketed higher.
But something else is at play … and that something is Moore’s Law.
Moore’s Law Hits the Top Line
Moore’s Law, which turned 50 in 2015, was described by Intel Corporation (NASDAQ:INTC) co-founder Gordon Moore as an expected increase in circuit density on silicon, doubling every 18 months ago as far as he could see, in 1966.
But, as I have been writing for many years now, Moore’s Law also turned traditional economics on its head. Moore’s Law is deflationary, and the deflationary impact grows with time, as integrated circuits are incorporated into more and more things, and as the impact is compounded by its use in various ways.
In the case of Best Buy, this means the products it sells lose value as soon as they leave the factory, and the retailer is under enormous pressure to get them out the door before their value disappears. This isn’t new, but in 2016 it hit one of the company’s primary growth sectors: big-screen TVs.
A TV that would have been unaffordable just a few years ago — 5 feet wide on the diagonal — is now available at Best Buy for just $600. More important, flat-screen sets just don’t break. I still have one from 2001.
Best Buy still makes money on that 60-inch set, but the price point is lower, and this is true for all consumer electronics. Whole categories that used to represent big profits, like back-up drives, DVD players and packaged software, have disappeared as consumers find they can get and save files to cloud services.
Bottom Line on BBY Stock
The new administration wants to whip deflation now and, by allowing price hikes on oil and other resources, they could achieve the goal. China, too, seems dedicated to fighting deflation, giving raises to many workers in a more competitive market.
This should mean good news for Best Buy, which is focusing more on products like ovens and washing machines that have mechanical parts which sometimes break. A new round of high-end phones should also help the top line.
Bottom line? At a price-to-earnings multiple of under 14, and a dividend yielding 2.5% (that the company is in a great position to raise), BBY stock might be Best Buy’s best bargain.
Dana Blankenhorn is a financial and technology journalist. His latest novel is Bridget O’Flynn vs. Something Big & Ugly. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he was long AAPL and INTC.
