Rivals like Ultimate Electronics, Circuit City, and Fry’s Electronics were flashes in the pan compared to this consumer electronics retail giant, which leads to an obvious question, is Best Buy stock a Buy?
It wasn’t all glitz and glamour to get here. As recently as 2012, Best Buy was dying at the hands of Amazon Prime. But its corporate strategy is people focused, and after its CEO was replaced, it solidified relationships with major brands like Apple (AAPL) and Samsung.
The stores became a showroom for brands, giving people a chance to get their hands on with technologies they may only have read about before. Nothing you read on Google (GOOG) will replace the real experience of putting on an Oculus Quest 2 virtual reality headset. It must be experienced in person.
Leveraging this customer and vendor relationship dynamic kept the company in business and helped it reach a historic high market capitalization in an increasingly virtual world that bankrupted retailers large and small.
Is Best Buy worth buying or will investors need an extended warranty?
Best Buy Extended Warranties Are A Golden Goose
Best Buy is North American consumer technology retailer known for its impressive brick-and-mortar presence while also doing anything it can to compete with the likes of Amazon (AMZN), Costco (COST), and Walmart (WMT).
One of the company’s biggest revenue streams is its extended warranties. Best Buy’s Geek Squad provides consumer-facing IT support for purchased electronics. These policies are known for their low payout ratios, which means they’re huge money-makers for the company.
It sells a variety of consumer products, including home entertainment, appliances, video games, computers, and media. Many Best Buy stores are equipped with in-house car audio installation bays that provide certified professional infotainment installation services.
Another secret to Best Buy’s success is its price-matching guarantee. It will match Amazon’s price, so you can own it today instead of waiting two days for shipping. This puts the power back in the hands of the brick-and-mortar retailer by focusing on human interactions in the face of Amazon’s automation.
But is that enough to win the retail war?
Is Best Buy Stock A Buy?
Best Buy had a market capitalization over $25 billion at the end of 2020, with a P/E ratio around 15x. It crashed to a 52-week low of $48.10 at the onset of the pandemic before surpassing pre-pandemic levels to trade just over $100 per share by year end.
The company increased its dividend yield in 2020, paying a $0.55 cash dividend each quarter besides a suspended March payment for a total of $2.20 annual yield, or 2.15 percent. It consistently paid this dividend over the past seven years.
Best Buy beat analyst forecasts and grew both in-store and online sales during the third quarter. Revenue for that quarter was $11.85 billion, with 23 percent same-store sales growth and 174 percent growth in digital sales.
Still, it’s unclear how the company will fare when the dust settles after the holiday season. The hottest holiday items are all tech-related (PlayStation 5, Xbox Series X, GeForce RTX 3090), but coronavirus manufacturing delays left retailers struggling to keep shelves stocked.
Unclear guidance for the holiday season deflated the BBY share price in December and could continue stalling growth until the earnings reports come. And retail is facing another tough year, adding to the growing challenges.
Risks Of Buying Best Buy Stock
Best Buy survived this far, but it’s not going to be an easy road to victory. Both Walmart (WMT) and Amazon (AMZN) (along with Target (TGT) and everyone else) fought to get the best priced and most wanted holiday deals on shelves in December. When final tallies come in, there’s a chance BBY lost market share to one of its competitors.
And holiday spending was overall lower in 2020 as consumers stressed over a second stimulus bill. It got delayed in Washington, leaving many wondering if they will even have a place to live in 2021. When rent isn’t paid, there’s no way someone’s buying an expensive gaming console.
Best Buy CEO Corie Barry needs to remain nimble and meet changing market needs. The economy is headed for the unknown in the 2020s, and it’s not yet clear what people can afford once government stimulus payments run out.
Best Buy Vs Walmart Vs Amazon
Best Buy beat many competitors over the years, but it still has long-lasting rivalries with Walmart and Amazon. It’s also competing with NewEgg and Target (TGT), while Home Depot (HD) and Lowes push past its appliances and offer more electronics too.
One of Best Buy’s partners in the fight is eBay (EBAY), which has hosted a successful Best Buy store for years. Amazon (AMZN) all but owns “high purchase intent” internet search traffic, and the combination of Best Buy and eBay gives them both a way to compete.
Of course, the retailer’s doom was prophesized by bears for years. The death of retail is highly exaggerated if one would look at Best Buy’s books.
Is Best Buy Stock A Buy? The Bottom Line
Best Buy survived the retail culling by Walmart, Amazon, and the coronavirus. Each of these three things devastated hundreds of retailers, taking their bottom lines and forcing them out of business. But through it all, Best Buy shined with a focus on people and prices.
You can order from Best Buy online or in-store and expect the same great service. It also offers extended warranties through its famed Geek Squad tech support.
This made the company a shining star in dark times for other stores. It held its own and reported growth during the pandemic. Its biggest problem is not having enough stock of the hottest holiday items. But its smart online marketing strategy and high customer satisfaction ratings make Best Buy one of the best buys in retail stocks.
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.