Beware If You Own This Stock

Some stocks were darlings in 2020-21, only to become pariahs in 2022. Look no further than Peloton to see an example of how high a company can fly and how low it can fall. Others have solid business models but now seem to be chasing near impossible year-over-year comps. Best Buy falls into this latter category, and if you own it, beware.

Best Buy (BBY) performed very well during the pandemic as consumers invested in the electronics they needed to work from home and stay entertained during lockdown. Now that so many states and countries have reopened, management appears to be feeling the pressure from Wall Street to maintain high sales figures.

Unfortunately for shareholders, it looks like Best Buy is moving away from its core competencies in an effort to get more shoppers inside its stores. Its recent and upcoming moves include adding:

• telehealth,
• e-bikes and scooters,
• patio furniture, and
• beauty care to its offerings.

Best Buy Moves Away From Consumer Electronics

In 2021, Best Buy purchased the U.K. telehealth company Current Health. This makes sense in some ways since the growing reliance on telehealth will encourage consumers to purchase electronics that save them money and time in the long run. On the other hand, Best Buy doesn’t have experience operating as a healthcare equipment provider. Convincing consumers to visit its stores to buy telehealth devices seems like a stretch.

Last year, Best Buy also purchased Yardbird, a company that makes outdoor furniture. Again, there is a slight but tenuous connection between Yardbird’s sustainably sourced outdoor furniture and Best Buy’s brand as a consumer electronics store.

One could argue that the ongoing work-from-home trend means that the concept of an office has evolved so much that it could include outdoor furniture. While it’s easy to imagine someone working from a poolside sofa, it’s harder to imagine Best Buy as the right place to buy the sofa.

This isn’t the first time that Best Buy has wandered away from its core competencies. In the past, it has also tried to expand its reach by acquiring a record store and Napster, a peer-to-peer file-sharing app that has evolved into a music-streaming service.

Those attempts didn’t benefit Best Buy, and it’s hard to see how the recent moves will do much better.

Best Buy Stock Price

Although some of Best Buy’s decisions were known last year, the company’s strong revenues helped to keep its stock price high.

Best Buy share price stayed above $100 throughout last year, peaking at $136.13 on November 19, 2021. The company’s share price had never come especially close to $100 until the latter half of 2020. In 2019, share prices oscillated between about $50 and $90. Not surprisingly, the price fell sharply in March of 2020. After the drop, Best Buy began a rapid climb.

Savvy investors saw the November 19 2021 peak as a good time to sell and lock in a return on their money. Before the end of December, the stock briefly slipped below $100. It has experienced several quick jumps and falls during 2022. Overall, though, it has trended downward. At the time of research, shares traded at the lowest they’ve been since the summer of 2020.

Could Best Buy Remain a Good Investment?

Q4 2022 revenues, released in early March, weren’t as strong as Q4 2021 revenues. Those disappointing results certainly contributed to the stock’s falling price.

Comparable sales were down 2.1% between Q4 2022 and Q4 2021. Best Buy still generated strong revenues, but it didn’t grow as rapidly as it had the previous year. Leadership expected growth to slow somewhat, which could have triggered them to focus on new opportunities to grow the brand.

Now the question is whether Best Buy is chasing false avenues in an attempt to sustain impossible levels of growth. The reality is government stimulus has evaporated and work conditions have changed so the future is unlikely to be as bright for the company’s core business.

The fear of worsening year-over-year comps, however, has put a lot of pressure on management. It appears that Best Buy may have miscalculated its potential by stepping outside of its core competencies in an attempt to spur growth. It seems strange to use its clout to acquire an outdoor furniture company.

A more realistic approach would probably involve advertising the benefits of its Totaltech membership program, which lets members pay a flat annual fee for services that include free two-day shipping, VIP customer services, free Geek Squad tech support, and lower prices on select products.

It has some similarities to Amazon’s Prime membership, and it can generate significant profits from consumers willing to spend about $200 per year for peace of mind and premium services.

Should You Buy, Sell, or Hold Best Buy?

Best Buy remains a strong company with potential but it is making questionable strategic choices right now. It’s not impossible that Best Buy’s bet could work in its favor. We can’t ever forget how consensus was to view Amazon’s move to AWS as a strategic mistake. In retrospect, Amazon’s move was obviously smart but at the time Bezos was heavily criticized.

With that in mind, shareholders will need to decide whether Best Buy management are chasing Wall Street year-over-year comps and making a strategic error or if they have an innovative growth lever to hand ready to re-ignite growth. For most investors, it’s not a time to hold your breath that management will be vindicated.