Meme stocks have made an unexpected comeback on Wall Street lately, after Keith “Roaring Kitty” Gill recently returned to social media - effectively reviving interest in GameStop (GME), the long-suffering video game retailer that became the centerpiece of a short-squeeze revolution back in 2021. And while “diamond hands” investors were quick to rally back around Gill and the GME narrative, analysts continue to recommend against buying into GameStop's money-bleeding business model.
However, for investors who can't resist the idea of adding an electronics retailer to their portfolios in 2024, there's one name out there that Wall Street is actually warming up to: Best Buy (BBY), which recently stunned with relatively impressive quarterly earnings. Here's a closer look at the chain store, which just scored an upgrade to “Buy” at UBS on the strength of its recovery story.
About Best Buy Stock
Founded in 1966 as Sound of Music and rebranded to its current avatar in 1983, Best Buy (BBY) is a multinational consumer electronics retailer, operating primarily in the U.S. and Canada. The big-box chain sells electronics, appliances, software, video games, and related services through physical stores and online platforms. The company currently commands a market cap of $20.2 billion.
BBY stock is up 18% on a YTD basis, and set a new 52-week high as recently as Tuesday. The stock is outperforming the broader S&P 500 Index ($SPX), which is up 14.7% this year.
While the stock already trades around new highs, UBS analyst Michael Lasser believes that Best Buy is “fully charged” for more upside, and set to benefit from an upcoming consumer appliance upgrade cycle, as well as a revenue boost from new product offerings, like e-bikes. The analyst anticipates these tailwinds driving a “nice recovery” in sales for the back half of this year and into 2025.
Lasser also weighed in favorably on Best Buy's restructuring and its impact on the bottom line, writing, "Its employees per store has fallen from 102 in FY'20 to 77 last year. Even if this rises to 83, and BBY comps up 3% next year, it could drive EPS of $7.30+ (versus cons. $6.70 today)."
The UBS analyst wrapped up his note by saying that “Best Buy shares offer a compelling risk-reward skew,” and hiking his price target to a new Street-high of $106.
Best Buy Gains Ground After Q1 Earnings
Ahead of the upgrade from UBS, Best Buy stock was already in rally mode following its well-received first-quarter results, released on May 30.
For Q1 of FY 2025, Best Buy reported revenues of $8.85 billion, down 6.5% year over year on softness in both the domestic and international segments. That fell short of expectations for revenue of $8.97 billion. Same-store sales were down 6.1%, narrower than the 10.1% decline reported in the year-ago period.
However, earnings per share (EPS) rose 4.4% to $1.20, easily surpassing the consensus estimate of $1.07, as gross margin expanded to 23.3% and operating margin improved to 3.3%. Notably, Best Buy's EPS have topped expectations in each of the past five quarters.
The retailer reported net cash from operating activities of $156 million, compared to an outflow of $331 million a year ago. Free cash flow was $4 million, reversing the year-ago outflow of $535 million. Overall, the company closed the quarter with a cash balance of $1.5 billion.
Notably, Best Buy stock also offers a dividend yield of 4% at current levels, which is more generous than the retail sector median around 2.2%. Additionally, the company has been raising dividends continuously for the past 13 years.
What's Driving Growth at Best Buy?
Best Buy occupies a prominent market position in the U.S. consumer electronics market, one of the largest in the world. Per its latest earnings call, the retailer has a third of the market share in both the domestic Computing and TV industries, along with 20% in Gaming. That leaves Best Buy in a solid position, as this report indicates the consumer electronics market is set to expand at a CAGR of 7.63% between 2024 and 2032 to reach a market size of $1.47 trillion.
As UBS noted in its upgrade, Best Buy should benefit from device upgrades - bolstered by its exclusive partnership with Microsoft (MSFT) to sell AI-powered laptops. Microsoft has announced a full line of Copilot Plus products, with 40 models, about 40% of which are exclusive to Best Buy. Coupled with upcoming AI-fueled launches from Apple (AAPL), along with improving housing trends that are supporting appliance sales, Best Buy could be on the cusp of a major replacement cycle for devices and other electronics.
Further, Best Buy goes beyond selling electronics by offering an enhanced customer experience through their Geek Squad. These tech experts don't just fix technical problems; they prioritize building relationships and ensuring customer satisfaction. This service-driven approach strengthens the in-store experience for many Best Buy shoppers, helping to build engagement.
Analysts Are Coming Around on Best Buy Stock
Analysts have an overall rating of “Moderate Buy” for the stock, with 10 analysts out of 22 calling the stock a “Strong Buy” - up from just 6 “Strong Buys” a few months ago. The remaining ratings consist of 1 “Moderate Buy,” 10 “Holds,” and 1 “Moderate Sell.”
UBS has the new Street-high target of $106, implying expected upside of 14.7%. Notably, valued at around 15x forward earnings, Best Buy stock is priced at a discount to its retail peers.
On the date of publication, Pathikrit Bose did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
