How High Will Best Buy Stock Go?

Best Buy (NYSE:BBY) has run into its fair share of financial bumps over the past few years that have slowed down progress.

Whether it’s the decline in PC sales demand, or the decrease in purchasing of computers and other electronics since the 2020-21 era, the result has been to hurt Best Buy’s top line. To give you a sense of the magnitude of the decline, sales are down from $15.1 billion in Q1 2020 to $9.2 billion last quarter.

To overcome these challenges, Best Buy changed its business model to survive in a new retail environment. It restructured and shifted support to online sales and customer interactions in an effort to set the company on the right track.

While Best Buy share price has declined more than 20% in the last three years, it has risen about 33% over the past twelve months thanks to its renewed focus on customer experience.

Now trading at 17.2x earnings and generating $42 billion in annual sales, is the company’s $21.6 billion market cap a steal?

AI Investments Set to Drive Growth

Like so many other large enterprises, Best Buy had embraced artificial intelligence fully to improve customer satisfaction and support digital innovation. Recently, management stated that the company is gearing up to offer a new lineup of personal computers with AI. 

The real purpose of AI is to gather information on customer opinions and behavior to develop more relevant advertising campaigns and make better product recommendations.

The company partnered with Google Cloud and Accenture to help redesign its marketing approach with the help of generative AI, in hopes of offering customers better tech-supported experiences.

In line with these strategies, Best Buy is enhancing its digital solutions for online shopping by overhauling its website and mobile app to include chatbots for customer care services and AI for virtual fittings. Its generative AI-integrated virtual assistant will assist customers with product concerns, delivery updates, as well as software and Geek Squad subscriptions.

Restructuring Efforts To Boost Margins Long-term

As part of its growth initiatives, Best Buy has a full restructuring plan in place that includes adapting stores, closing unprofitable stores, and potentially opening new store formats better suited to customers’ needs.

Gone are the days when a Best Buy store needed 20 salespersons on the floor. As a result, store closures are set to decrease overhead costs, streamline operations, and make supply chain processes more efficient. Some layoffs will occur at brick-and-mortar locations as the company takes steps to gain more favorable contracts from suppliers.

At the end of the fiscal year ending January 2024, the company closed 24 stores and expects to close 10 to 15 stores by the end of FY2025. These closures resulted in rounds of layoffs and job restructurings.

In Q3 2024, the company generated $291 million in net income but it was dragged down by costs related to employee termination benefits.

Near-Term Challenges

In Q2, Best Buy missed projected quarterly sales by 1.3% in Q1 due to weak end-user demand, which was most apparent in the company’s consumer electronics business. Also, there was a decline in purchases of discretionary items as consumers wrangled with inflation.

Revenue dropped to $8.85 billion from $9.47 billion year-over-year but by Q3 sales had topped $9.2 billion. Domestic revenue in Q2 was $8.20 billion, a decrease of 6.8% YoY, primarily driven by a comparable sales decline of 6.3%.

International revenue fell by 3.3% to $644 million, driven by a comparable sales decline of 3.3% but the company’s non-GAAP EPS increased to $1.20, up $0.05 year-over-year, surpassing analysts’ estimates by 11.8%.

Comparable sales have been low as the company copes with the consequences of nearly two years of exceptionally high 2020-21 era sales. The electronics retailer has scrambled waiting for the typical laptop lifecycle to return to normal and for new tech gadgets to compel the public to shop in-store and online.

It did seem by Q3 with gross margins rising to 23.5% and sales up alongside a continued flow of positive earnings before interest and taxes that Best Buy’s initiatives were on track for long-term success.

How High Will Best Buy Stock Go?

Best Buy stock could go as high as $102 per share, the consensus price target among 22 analysts.

Closing underperforming locations, while prudent, does raise concerns that the brick-and-mortar business model is in jeopardy over the long haul.

The renewed focus on customer experience whether it’s faster online checkouts or the integration of AI has the potential to support the share price, and certainly Wall Street has responded positively over the past year.

Short-term the stock appears to be in somewhat overbought territory, though other metrics suggest it’s still a deal, such as the 0.5x price-to-sales ratio.

So too the 3.75% dividend yield and growth streak over the past 6 years bode well for income investors. With a 63% payout ratio, it’s a little more elevated than a conservative investor would like to see but it’s not cause for excessive concern just yet.

The bottom line is Best Buy remains highly profitable, and is likely to enjoy even higher margins after closing certain locations. With sustained profitability on the horizon, expect the company to be a solid long-term investment, even if a shorter-term pullback is warranted.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.