These are the best of times for Best Buy (NYSE:BBY). Strong third-quarter earnings with raised holiday estimates sent the shares up 10% before Thanksgiving. For the quarter ending Nov. 2, Best Buy earned net income of $293 million, or $1.10 per share, on revenue of $9.8 billion.
Since then, shares have lost a third of their post-earnings rally. But at an opening price of $77.50 on Dec. 3 and with a market capitalization of $20.4 billion, the stock looks interesting. The trailing price-to-earnings ratio is just 13.7, and the 50 cent dividend still yields 2.5%.
What could possibly be wrong?
As Good as It Gets
Very few physical stores are getting through 2019 with their stories intact.
People who study retailing for a living say the winners are broad-based department stores where people believe they’re getting good prices, like Target (NYSE:TGT), Walmart (NYSE:WMT) and Costco (NASDAQ:COST), along with unique high-end shops with control over production, like Lululemon Athletica (NASDAQ:LULU).
Increasingly, the winners in the value category are doing the Lululemon trick, creating store brands like Target’s Cat & Jack kids’ line seen as worthy of a trip.
Best Buy doesn’t seem to fit in either category. It has no store brands, just the same gadgets you can buy at Walmart or online through Amazon (NASDAQ:AMZN). What I’m hearing from friends who shop there is that Best Buy is simply there when they need it. They can go out shopping, make a purchase and return it if needed.
This means Best Buy is finally getting the “monopoly” benefits from when rivals like Circuit City went under a decade ago. Best Buy has become a classic “category killer,” like Staples or the old Toys “R” Us chain, but in a category that seems to still be alive.
But what happens when gadget season ends?
Who will be in Best Buy this February, as holiday shoppers turn back into workers?
In the past, Best Buy has tried marketing appliances, things like refrigerators and ranges. This hasn’t worked especially well. The latest wrinkle is to target older consumers. Best Buy recently bought a monitoring business covered by Medicare Advantage plans. It has tried to expand convenient merchandise pick-ups through UPS (NYSE:UPS) and CVS Health (NYSE:CVS). It even hired a chief medical officer.
The question is whether this can plug the gap. Best Buy says it now has over 2 million service subscribers, who pay $199 per year to have its “Geek Squad” tech support on standby. What began as a repair service has been turned into a customer service portal, with advice offered online, by phone, in stores and through service calls.
There are risks. Scammers are using Best Buy’s reputation to grab customers’ data and, eventually, their money. Computers brought in with illegal files become criminal evidence. Service is called a “pain point” for a reason. One bad day with a clerk can turn into a fast-spreading rumor that has the power to tarnish the company’s image.
The Bottom Line on Best Buy Stock
Best Buy is telling analysts it could hit $50 billion in revenues for 2025. That sounds good until you realize it’s on pace for $43 billion of revenue in 2019.
Winning in electronics retailing means constantly fighting the deflation that still comes with Moore’s Law. I like to think of Best Buy as a giant refrigerator with a bit of rotten food hidden on the back shelf.
Best Buy products become obsolete well before they break. These risks are not currently priced in the stock. That’s why I won’t buy it here.
Dana Blankenhorn is a financial and technology journalist. He is the author of the environmental story, Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in CVS and AMZN.