Buy the rumor, sell the news. It’s one of the hoariest of stock market clichés. It certainly applies to Best Buy (NYSE:BBY) and BBY stock. After it blew out earnings estimates for the quarter ending August 3, the stock sold off in overnight trade.
Earnings of $1.71 per share nearly doubled analyst estimates of 99 cents. Revenue of $9.9 billion beat estimates by nearly $300 million.
Best Buy was due to open at $113.75 on Aug. 25, giving back all its gains of the previous day. The price represents a market cap of $31.3 billion, over 75% of the company’s annual sales rate. Its price to earnings ratio is 21.5, in line with the market. The 55 cent/share dividend, next payable October 6 to shareholders of record Sept. 15, yields about 2%.
BBY Stock Pulling the Punch Bowl
While the second quarter numbers were splendid, Chief Financial Officer Matt Bilunas offered a downbeat view on the rest of the year. He told investors not to expect another quarter of 20% growth. He said the company could not offer guidance on the rest of the year. He also offered a litany of potential woes.
He cited “potential future government stimulus actions,” which may mean consumers have less money. Bilunas worried about “the current shift in personal consumption expenditures,” meaning the pandemic might end. He worried about “the risk of higher unemployment over time,” meaning the pandemic may not end. He talked about “the availability of inventory to match customer demand,” meaning the U.S.-China relationship may batter suppliers.
Bilunas’ job is to worry. But the worry ended a lovely run in the stock, up 117% since hitting its low of $53/share in April. The stock had also gotten ahead of itself, hitting an all-time high. It now trades ahead of analysts’ one-year price target, which averages $110.
CEO Corie Barry echoed Bilunas, saying inventory was limited in some categories, which cut into growth.
Time to take profits, then.
Reasons for Optimism
Investors with a longer-term view may see the pullback as an opportunity.
Best Buy has proven resilient against the rise of Amazon (NASDAQ:AMZN). It’s one of the few big box specialty retailers that have. Online sales literally tripled during the quarter, year over year, to $4.8 billion.
Best Buy closed its stores during the pandemic, switching to a curbside pick-up model. It re-opened slowly by appointment, although stores are now fully open. Half the 51,000 workers furloughed in April are now back at work.
Best Buy has also learned to cooperate with Amazon, offering deals that combine Amazon’s Echo speakers with various smart gadgets.
While other big boxes with specific niches have gone under like Toys R Us, or gone private like Staples, Best Buy is still growing. This is helped by its “Geek Squad,” acquired in 2002, which offers tech support services. Even when customers buy online, they often buy support contracts managed through the stores.
The Bottom Line
I have been skeptical of BBY stock for years. The nature of the stores has had to shift constantly, as CDs gave way to phones, as PC sales drifted down, as the stores increased, then decreased in size.
Somehow Best Buy has managed to ride those waves. Some 40 years after the PC revolution, what began as a consumer electronics store is the last big computer retailer, and one of the last big box retailers of any type, still standing.
It hasn’t been easy. Technology is like fruit, in that its value declines in inventory. Support contracts have long been the butt of jokes, a tax on things that don’t break.
Maybe it’s time to give Best Buy some respect, a place among the stocks you buy on weakness.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.