Shares of Best Buy (NYSE:BBY) have been on fire in 2019, rising more than 40% year-to-date amid a flurry of operational improvements. Namely, economic and financial market conditions have substantially improved in the new year. Those improvements, coupled with a strong holiday quarter earnings report, provided a strong lift to Best Buy stock in 2019.
But the stock is still well off its all-time highs. The valuation remains cheap at 13-times forward earnings. Finally, the fundamentals remain healthy, with a strong U.S. consumer base and an economy becoming more tech-heavy. In other words, this rally in Best Buy stock isn’t over just yet.
My numbers suggest that this rally won’t top off until $80, and that bullishness should remain throughout 2019. As such, I’m not selling just yet. BBY stock has a visible runway for further upside over the next few months and quarters.
Best Buy Is A Long-Term Winner
Owing to its robust exposure to and leadership position in the still rapidly expanding consumer-technology market, Best Buy projects as a winning business for the next several years.
The logic is fairly straightforward. Technology is advancing rapidly, with products integrating higher levels of intelligence. It started with smartphones. Now, we have smart tablets, smartwatches, smart TVs, and smart appliances. Tomorrow, we will have smart clothing, smart cars…indeed, almost anything you can think of.
In other words, the entire consumer space is becoming “smart.” This translates to every consumer product gradually transitioning into consumer technology products. And where do tech-savvy consumers go? Best Buy, both because that’s the niche that BBY services, and because they have the personnel which can help consumers become acclimated to fresh innovations. Therefore, as the consumer-technology space continues to expand over the next several years, Best Buy will become an increasingly important player in the broader retail market.
To be sure, this doesn’t mean Best Buy projects as a big grower like Amazon (NASDAQ:AMZN). Quite the opposite, in fact. Given its maxed-out store footprint and business maturity, Best Buy will grow slower in coming years. But that deceleration will remain steady and stable, mostly because it’s supported by the aforementioned secular tailwinds in consumer-tech expansion. Margins should likewise remain stable against the backdrop of healthy demand.
All in all, then, signs point to Best Buy as a healthy, stable, and winning business over the long haul. Ultimately, that implies good upside for BBY stock.
Near Term Upside Looks Good
The bull thesis in Best Buy stock breaks down into two parts. First, in the long term, stable growth on top of a cheap valuation will produce healthy returns. Second, in the near term, healthy economic conditions and broad consumer-tech expansion will drive operational out-performance.
On the first point, Best Buy stock is very cheap. It trades at just 13-times forward earnings, versus a market-average forward multiple north of 16. At that low of a multiple, slow but consistent growth should be enough to produce healthy returns for shareholders. Assuming some combination of 0% to 2% revenue growth, margin stabilization, and buybacks, earnings should grow at mid-single digit rate for the foreseeable future.
That’s why I think $7.50 in EPS is achievable by fiscal 2025. Based on a historically average 14 forward multiple, that implies a reasonable fiscal 2024 price target of $105. Discounted back by 7% per year (three points below the 10% discount rate to account for the yield), that equates to a fiscal 2020 price target of roughly $80.
On the second point, economic improvements imply that Best Buy will out-perform in 2019. Specifically, in the U.S., the unemployment rate is hovering near record lows, while borrowing rates are also deflated. In addition, wages are rising by the most they’ve risen in a long time. Plus, the stock market is hitting record highs, and consumer confidence has come roaring back after a late 2018 lull.
Those improvements indicate that we have an American consumer today who is ready to spend big on relevant tech. That willingness should ultimately lead to Best Buy putting up good numbers throughout 2019 as new consumer-tech products launch throughout the year.
Bottom Line on BBY Stock
Best Buy stock has rallied in a big way so far in 2019. Better yet, shares will stay in rally mode for the foreseeable future, thanks to a strong economic backdrop, continued tailwinds in the consumer tech space, and a favorable valuation. All things considered, the retailer has visible upside to $80 within the next several quarters.
As of this writing, Luke Lango was long BBY and AMZN.
