Why Some Analysts Are Still Wrong About Best Buy
If there is one company that analysts have been almost universally wrong about, it's Best Buy . At the end of 2012, with its share price near $11, nearly everyone was predicting the company's demise. But as the turnaround effort has made progress, lifting the shares by nearly a factor of four, most analysts have changed their tune.
But some continue to predict the end of Best Buy at the hands of Amazon.com , setting price targets as low as $9 per share until recently. While some of those price targets have since been doubled, some analyst remain ultra-bearish on Best Buy.
Thankfully for Best Buy investors, these arguments don't hold much water, and they're actually contradictory to statements made earlier this year regarding GameStop .
The argument against Best Buy
The argument put forth is the same argument people have been using to foretell the death of brick-and-mortar retail for the past decade. Sales of DVDs, CDs, and games have been declining for years, with no sign of letting up. However, what they fail to mention is that Best Buy has greatly reduced the floor space dedicated to these categories, however, replacing them with higher-margin items.
Some also say that consumers are turning to the Internet for "brainless purchases," such as batteries, iPhone chargers, and iPhone cases. Some go on to say that the growth of Amazon Prime, now with an estimated but far from confirmed 20 million members, has caused people to buy routine items online instead of in stores.
If this were true, then companies like CVS Caremark and Walgreen would be out of business, and Wal-Mart would be in a downward spiral. The problem with this argument is that people don't want to wait two days to get most of these "routine" items. If the batteries in my remote control die, I'm not going to order replacements on Amazon and twiddle my thumbs as I wait. I'm going to go to a store and buy them, even if they're a little more expensive. Convenience has value, and often Amazon is not the most convenient choice.
Electronics are unique in that people generally want to see in person what they're buying, and since Best Buy now price-matches Amazon, there's no reason to wait two days in order to pay the same price. Some of these analysts also fails to mention the massive cost cuts that Best Buy has gone through, allowing the company to cut prices while reducing the negative effects on margins. It seems that they are pointing out problems that existed a year ago instead of recognizing the changes that have been made. If Amazon was able to kill Best Buy, it would have happened already.
The GameStop contradiction
Back in June, some of these analysts stated that video game retailer GameStop was a buy, with strong game sales driving the company forward. The company's diversification into consumer electronics was also cited as a positive. How one can argue for GameStop, which sells a subset of what Best Buy sells, and against Best Buy, stating that Amazon will kill Best Buy but somehow GameStop is immune, is truly baffling.
The bottom line
Best Buy has taken huge steps to cut costs and become more competitive since CEO Hubert Joly took the reins, and the arguments being levied against it don't account for this progress. Best Buy is still a profitable company, and I don't expect that to change any time soon.
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The article Why Some Analysts Are Still Wrong About Best Buy originally appeared on Fool.com.
Timothy Green owns shares of Best Buy. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com and GameStop. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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