Best Buy Stock: Value Play Could Beat Expectations

Over the past month, electronics retailer Best Buy (BBY) stock has seen a significant slide in price. Since August 27, it’s pulled back from $117.50 per share, to around $108 per share.

Already a fairly cheap stock, shares have become even cheaper with this pullback. At current prices, it trades at a forward price-to-earnings, or P/E, ratio of 11.8x. That said, there’s logic behind this sudden spurt of bearishness when it comes to Best Buy.

There’s big concern that the company’s performance will underwhelm going forward. Plus, as investors still fail to appreciate its pivot into an omnichannel (online and in-store) retailer, the market has been unwilling to give it a valuation on par with its more generalist peers.

Nevertheless, I am bullish. Its current stock price more than accounts for its risks. Not only that, results in the quarters ahead could lead investors to change their long-held perceptions.

If this happens, shares may be able to experience a rebound in price. (See BBY stock charts on TipRanks)

Why BBY Stock Has Sold Off

Back in August, strong quarterly results gave shares in Best Buy a boost. With sales and earnings rising year-over-year by 19.6% and 75.8%, respectively, its numbers came in well ahead of expectations.

Even the company’s guidance saw improvement. Before, guidance called for it to see a high-single digit sales decline in the current quarter (ending October 2021). Its new guidance now calls for sales growth ranging from -3% to 0%. 

Since briefly popping above $120 per share, as discussed above, BBY stock has slid back toward. Why? The overall economic “reopening”  has played a big role in Best Buy’s strong numbers over the past two quarters.

So has the fact that remote working remains widespread, as offices have delayed a full “return to work”  due to the Delta variant outbreak.

As both tailwinds start to fade, expectations are for far less impressive results in the quarters ahead. Those expectations might be wrong.

Incorrect Perceptions

Recent concerns have made BBY cheaper. Even when it was trading above $120 per share, it was a cheap stock, with a relatively low forward P/E ratio.

Many still believe, despite its pivot from strictly brick-and-mortar to omnichannel, that the company is still a “dinosaur,” at risk of getting squeezed out by e-commerce plays like Amazon (AMZN).

Along with this, investors have long expected the boost in electronics demand to be short-lived. This is why Best Buy has traded at a far lower forward multiple than other retailers benefiting from pandemic and post-pandemic tailwinds, like Target (TGT).

Yet the market may be wrong in both its views on Best Buy. Its omnichannel transformation removed much of the competitive disadvantage it once had to Amazon. Remote work-related demand for electronics may fall off once offices fully reopen. However, there may be something that more than makes up for it: rising inflation. 

Analyst Greg Melich from Evercore ISI recently included the stock as one of five retailers that could continue to thrive post-COVID, citing persistent inflation as a factor that will benefit the company’s top-line results.

Wall Street’s Take

According to TipRanks, BBY stock has a consensus rating of Moderate Buy. Out of 13 analyst ratings, eight rate it a Buy, four analysts rate it a Hold, and one analyst rates it a Sell.

The average BBY price target is $132.91 per share, implying 22.3% upside from today’s prices. Analyst price targets range from a low of $100 per share, to a high of $157 per share.

Bottom Line

Admittedly, stronger-than-expected results won’t turn this mature company into a growth story.

The top end of earnings estimates for the following fiscal year (ending January 2023) come in at $10.33 per share, just 6.3% above sell-side consensus of $9.72 per share for the current fiscal year (ending January 2022). 

Yet, hitting high estimates will likely enable shares to head back to prior price levels. Along with the potential for investors to re-assess their current perceptions of BBY stock, there may be a path for it to gradually make its way up toward its average price target.

Disclosure: At the time of publication, Thomas Niel did not have a position in any of the securities mentioned in this article.

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