Is Best Buy Stock a Sell?

Best Buy Co Inc (NYSE:BBY) seemed like it would be a casualty in the retail wars before it turned its fortunes around in the late 2010s. In spite of the threat from online titans, like Amazon, the company proved its showroom model of technology retail still works.

That was until COVID hit. With a market capitalization over $25 billion and government pandemic assistance funds run dry, is Best Buy stock a sell?

The company outperformed the broader market since 2019. It partners with brands to create showrooms and an extra level of service that can’t be found online. That drove its stock price comfortably to over $100 in the post-pandemic era.

It’s a gain of over 30 percent from former highs and displays the company’s resilience as much of the retail sector crumbled. But it wasn’t always this way – the company had a rough 20 years with the rise of e-commerce. And with online sales only set to accelerate, how long can Best Buy last?

Best Buy 101

Best Buy is a Richfield, Minnesota-based specialty consumer electronics retail chain with around 100,000 employees and 1,000 brick-and-mortar stores. The company was founded in 1966 by Richard M. Schulze as Sound of Music, and it specialized in high-fidelity stereo equipment.

It grew into a public company by 1985 and continued to revolutionize the concept store by creating a showroom for electronics. Even in a post-internet era, the ability to get hands-on experience with emerging technologies is out of reach for the average consumer.

On top of its in-store and online sales, the company’s Geek Squad also provides technical support to consumers.

Still, the emergence of online rivals like Newegg Commerce (NASDAQ:NEGG) and Amazon.com (NASDAQ:AMZN) destroyed competitors Ultimate Electronics, Frys Electronics, CompUSA, and Circuit City, along with specialty music and movie retailers.

So, how did Best Buy survive?

How Did Best Buy Compete With Amazon?

The biggest advantages Amazon had at the start were fast, at-home delivery and cheap prices. The Seattle-based conglomerate didn’t mind when consumers tried out products in showrooms only to later compare online for the lowest price – found at Amazon.

Best Buy was forced to match online prices to survive, and it did. BBY management focused on a human touch – the company pays its employees an hourly wage instead of commission, so they’re not incentivized to oversell.

And it fixed its inventory issues by acting as a showroom then shipping items to customers. One of the biggest problems with shopping brick-and-mortar is the need to go to different stores to find what you need, which may not be in stock nearby.

That helped the company compete with Amazon and survive a chaotic 20 years for retailers.

Best Buy Financial Outlook

The health and economic fallout of the past couple of years couldn’t stop Best Buy, which increased its comparable enterprise sales in the first half of the year to $23.49 billion versus $18.47 billion in the same period of last year. And it increased gross profits from 22.9 percent to 23.5 percent in the that time.

The electronics retailer outperformed guidance and analysts’ estimates in each quarter of 2021, a good sign for investors. Management continues to forge expansive relationships with product partners. Buying at scale enables BBY to procure goods at competitive prices that in turn allow it to sell at prices consumers embrace.

Still, it’s in a high-overhead business. Best Buy started this year with $5.49 billion cash on hand, which was down 18 percent to $4.34 billion by July 31. That has bulls wondering if the stock is a buy, sell, or hold.

Is Best Buy Stock a Good Buy Now?

Analysts broadly are in agreement that Best Buy is undervalued by about 20-40 percent. This means investors could expect an intrinsic value as high as $150 per share. A discounted cash flow forecast analysis reveals a price per share of $128 represents fair value.

The company pays a regular dividend and hasn’t missed a payment in over a decade. Its $2.80 annual yield makes it a solid dividend stock. It also continued raising this payment on an annual basis throughout the past 10 years.

Store Closures A Threat To BBY Share Price

Best Buy is performing well, but it’s still a brick-and-mortar retail business with a lot of risk. Quarantines sparked a retail apocalypse that shut down over 12,000 stores in 2020 and another 10,000 closures are expected in 2021.

And that’s just the start of the pending problems on our economy. 

Government stimulus funds ran dry by the end of the year (besides the infrastructure spending bill), and people are likely to tighten their purse strings and test this bull market’s momentum. While demand for new technology products isn’t going away, spending could stagnate if the economy takes a major downturn.

Is Best Buy Stock A Sell? 

Best Buy is an American specialty retailer that combines a strong e-commerce presence, in-store showroom, and after-sales service. This helped it continue to grow and flourish while its competitors lost ground to online competition with cheaper prices.

And its price match guarantee and shipping make it a formidable option for consumers to shop at.

Not only that, but despite its share price growth of 30 percent, it still has upside according a cash flow forecast analysis. Some analysts believe it is undervalued to the tune of 20 percent, which places it in the rare category of both an attractive value and dividend stock.

Hold it if you got it, and this isn’t the worst stock to add to your portfolio if you love retail and technology.

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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.