The once maligned electronics retailer Best Buy Co Inc (NYSE:BBY) has staged quite the comeback. After languishing around $10 per share at the end of 2012, BBY stock has soared to a multi-year high above $50.
But that huge, multi-year run-up will face challenges Thursday morning when the company reports first-quarter earnings. The underlying growth story is strengthening, but the valuation on BBY stock is also approaching cyclical highs.
There are reasons to buy Best Buy stock into earnings, but there are just as many reasons not to. Here’s my take:
The Confusing Story of Best Buy
When Amazon.com, Inc. (NASDAQ:AMZN) burst onto the scene, Best Buy was a natural victim. The “showroom” culture took off. Shoppers would go into Best Buy, leverage the experience of the in-store staff to discover the best product, and then head home to find the best price online. Often, that best price wasn’t found on BestBuy.com.
But times have changed. Best Buy’s price matching has played a pivotal part in turning customer interest into sales, but the company has also fortified its position as the leading electronics retailer. Competition is stiff, but Best Buy has survived.
BBY stock trades at 13.4 times trailing earnings. That may not seem that rich, but it’s a cyclical valuation high for this depressed stock. The valuation has been this rich only a few times over the past three years. Each time the valuation did get this high, the stock fell in the following months (late 2014, mid-2015, late 2015 and late 2016).
From this standpoint, Best Buy has to report an exceptional quarter Thursday morning for BBY to head higher. I don’t think that’s the case.
BBY’s Mixed Quarter
From what I’ve gathered, Best Buy had an OK quarter.
I’ve gathered mixed data regarding BBY’s digital sales in the quarter. Web traffic analytics site SimilarWeb shows that BestBuy.com has held its own in terms of web traffic share recently. Meanwhile, fellow web traffic analytics site Quantcast implies huge year-over-year gains in web traffic for Bestbuy.com. Google Trends, though, shows search interest has been relatively flat year-over-year.
In terms of shopping trends, it looks like Best Buy sold a lot of Apple Watches in the quarter. Apple Inc. (NASDAQ:AAPL) said that Apple Watch sales nearly doubled year-over-year last quarter. Target Corporation (NYSE:TGT) also said the the Apple Watch was a big seller in the quarter.
The home-building and furnishing trend also remains strong as consumers continue to allocate dollars to appliances and electronics. Appliances continue to be a strength at J C Penney Company Inc (NYSE:JCP). Home Depot Inc (NYSE:HD) also reported that appliances were a strength last quarter.
But Lowe’s Companies, Inc. (NYSE:LOW) just reported a shockingly lousy quarter, and that is a wrench in the industry-wide growth story. These home-building and furnishing stores are starting to rub elbows, and I am not quite sure how that played out for Best Buy in the quarter.
Bottom Line on BBY Stock
Overall, it looks like Best Buy may have had a great quarter, but more than likely just had an OK quarter.
That’s not enough to send BBY stock higher. When a stock is trading near a cyclical valuation peak, the company needs to really impress the Street to send the stock higher.
I don’t think that is what we have here with BBY stock. I’m avoiding it here, but think a selloff could be a buying opportunity.
As of this writing, Luke Lango was long LOW, HD, and AMZN.