To The Moon

$Best Buy(BBY)$

Retail is a tough industry, Charlie Manga often emphasizes how competitive it is, with low profit margins. Best Buy, a company specializing in electronics retail—TVs, smartphones, and similar products—has struggled in this environment. Since 2018, its stock has been stagnant, and its revenue has barely moved since 2008. Adjusted for inflation, the business has been in a significant decline.

Fundamental Analysis

This decline makes sense—customers no longer need to visit physical stores to buy TVs or iPhones when they can purchase them online at lower prices. Best Buy’s business model faces serious challenges. The only real support for its stock has been aggressive share buybacks. Since 2007, the company has reduced its outstanding shares by more than half, which has helped maintain earnings per share (EPS) growth. However, net income has remained flat since 2007, fluctuating slightly over the years.

During the post-pandemic period, in-person shopping saw a temporary resurgence, but Best Buy took on significant debt to fund share buybacks—about $5 billion in net debt over the last decade, equivalent to roughly 20% of its market cap. Some of this debt is tied to accounting rule changes regarding leases, but overall, the company has significantly reduced its cash reserves. In 2021, it held $5 billion in cash, but that number has since dwindled.

Looking at the company’s current state, comparable sales—a key retail metric that excludes the impact of new store openings and closures—declined by 2.9%. While that’s an improvement from last year’s -6.9%, it's still a concerning drop. The domestic segment, which makes up the vast majority of Best Buy’s revenue, has struggled, with international sales contributing only about $700 million—less than 10% of total revenue.

Earning Overview

In the third quarter of fiscal year 2024, Best Buy reported net income of $273 million, or $1.26 per share, slightly up from $263 million, or $1.21 per share, in the same period the previous year. However, this fell short of analysts' expectations of $1.30 per share. Revenue decreased to $9.445 billion from $9.756 billion, missing the anticipated $9.631 billion. Comparable sales declined by 2.9%. CEO Corie Barry attributed the softer-than-expected demand to ongoing macroeconomic uncertainty, customers delaying purchases in anticipation of deals, and distractions from the upcoming election. Following these results, Best Buy revised its full-year revenue forecast to $41.1–$41.5 billion and adjusted earnings per share to $6.10–$6.25, indicating a more modest outlook compared to previous estimates.

Despite the decline in sales, earnings have still increased, partly due to slight margin improvements but largely because of continued share buybacks. Domestic sales growth has been sluggish—hovering around 0.2% to 1% in recent years, except for a brief surge during and immediately after the pandemic. However, as pandemic-driven demand fades, sales are returning to pre-pandemic trends, with declines of -7% to -10%.

Growth & Market Sentiment

The key question is whether Best Buy can maintain even minimal growth in the future or if the downward trend will persist. The company has not been heavily reinvesting in its stores, with capital expenditures (capex) remaining largely unchanged since 2015. Without significant investment, it’s unclear how Best Buy can improve its long-term prospects.

Best Buy remains a traditional brick-and-mortar retailer—it buys products, stocks them in stores, and sells them at a profit. However, this business model is becoming less competitive, especially when compared to major e-commerce players that continuously invest in faster delivery networks.

In 2015, shopping at Best Buy made more sense. Ordering a TV or smartphone online often meant long shipping times and a complicated return process. At Best Buy, you had the advantage of speaking to a salesperson and taking the product home immediately. Today, though, you can get a TV delivered from Amazon in a day, with a seamless return policy and reliable customer support—all without leaving your home.

Best Buy has not significantly adapted to these changes, which highlights the challenges of traditional retail. Its primary advantage today is the ability to see and test products in person, but that puts it in direct competition with Walmart and Costco, both of which also sell electronics.

Historically, Best Buy has benefited from relatively high margins—around 3%—compared to the typical 1.5% margin in broader retail. While this might not seem like a huge difference, it's a 100% increase, making electronics an attractive category for competitors. As a result, Amazon and other online retailers are aggressively undercutting Best Buy’s prices while offering faster shipping and better warranties. Meanwhile, Walmart and other big-box retailers continue to eat into Best Buy’s margins.

Long-term, it’s hard to see Best Buy returning to meaningful growth. One of its remaining advantages is catering to older generations who prefer in-person shopping, need assistance with setup, or want delivery and installation services—something Amazon struggles to offer. Best Buy employees can install a fridge or set up a smartphone, giving the company a service-based edge. However, as younger, more internet-savvy shoppers become the dominant demographic, Best Buy’s value proposition continues to weaken.

Risk & Challenges

Ultimately, customers today can easily compare prices online and buy from the cheapest option, making Best Buy’s brick-and-mortar approach increasingly outdated. Without significant adaptation, the company faces a slow but steady decline.

Unlike companies with strong brand loyalty or proprietary technology, Best Buy lacks a significant moat (competitive advantage). Customers can easily compare prices online and purchase from competitors. Services like Geek Squad provide some differentiation, but they are not enough to protect Best Buy from competition.

Macroeconomic Uncertainty and Consumer Behavior

High inflation and economic uncertainty impact discretionary spending, leading to lower demand for expensive electronics. Trump Tariff War and A post-pandemic slowdown in electronics demand has further pressured sales.

Increasing Competition

E-commerce giants like Amazon offer faster shipping, better pricing, and seamless return policies, making it harder for Best Buy to compete. Big-box retailers like Walmart and Costco sell electronics at lower margins and attract price-sensitive customers. Direct-to-consumer (DTC) brands bypass Best Buy by selling directly through their websites.

Cash Flow

When evaluating Best Buy’s cash flow, we see a pattern: in good years, it generates around $2 billion, in bad years, just $500 million, and currently, it's sitting at about $1 billion. Given that the stock trades at an 18x multiple, it's hard to see a strong investment case.

The company is directing nearly all of its available cash into dividends and share buybacks—more so than ever before. It has also been taking on debt to sustain these buybacks. In boom times, such as 2020, when cash flow surged, Best Buy aggressively repurchased shares, but this only masks a deeper issue. A company can disguise stagnant earnings growth by buying back 10% of its shares, but the fundamental problem remains: Best Buy has seen no real growth in 20 years, and its margins are steadily eroding—down 3%, which is significant in retail.

If we assume earnings will continue at $1 billion and decline slightly over time, we must ask: how much is this business actually worth? Revenue has been flat for two decades, and with no clear growth prospects, share buybacks are the only mechanism supporting stock value.

Stock Buybacks

For buybacks to be highly effective, the stock must be cheap, and the company must have excess cash flow with minimal expenses. HP is an example where this works—the stock trades at a low 10x P/E, allowing for easy 10% buybacks. Best Buy, however, trades at 18x earnings while also paying a large dividend, limiting its ability to repurchase shares. With $1 billion in cash flow, about $800 million goes to dividends, leaving just $300 million for buybacks—not even enough to retire 2% of outstanding shares.

While Best Buy has, at times, had more cash available, that is no longer the case. Its growing dividend means that, moving forward, most investor returns will come from dividends rather than stock appreciation—unless free cash flow rises significantly. But with a business facing continued disruption, no strong competitive advantage, and no revenue growth, it’s unlikely that free cash flow will improve meaningfully.

Long-term, the company cannot continue taking on debt to fund buybacks. If we assume 75% of cash flow will go toward dividends, with the remainder going into buybacks, then at a 12x multiple, the stock still appears overvalued. Given its declining fundamentals, even a 12x multiple feels generous.

Valuation

Lack of Moat

Best Buy lacks a competitive moat, and you can see it in the revenue trends. In retail, if you don’t have a moat, you get squeezed by competition—and that’s exactly what’s happening. For that reason, I’m not buying the stock.

I believe a fair valuation for Best Buy would be around a 10x multiple, which would put the stock at approximately $46 per share. Currently, it's trading at $85, which just doesn’t make sense. The dividend is decent, but it consumes most of the company’s cash flow—and even then, it’s not particularly high because the stock price remains elevated.

Could Best Buy return to steady growth at 2–3% annually? Even in that scenario, with a 5% or 4% free cash flow yield and a 15x multiple, it would still be just an average business—not one that delivers a compelling 10% return.

On the flip side, if things go south and free cash flow declines further, Best Buy might not even have the ability to continue buybacks, relying solely on its dividend. In that scenario, an 8x multiple would bring the stock down to $33 per share.

Conclusion

I just don’t see much upside here. Even in a best-case scenario where free cash flow rises to $1.5 billion, the stock would still be trading above a 10x multiple—too high for a company with no real growth. So why not invest in a business with a stronger competitive advantage?

Best Buy lacks a competitive moat, and you can see it in the revenue trends. In retail, if you don’t have a moat, you get squeezed by competition—and that’s exactly what’s happening. For that reason, I’m not buying the stock.

What do you think? Let me know your thoughts below. Have a great day!

@Daily_Discussion @TigerPM @TigerObserver @Tiger_comments @TigerClub

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.