Analyst Holds Best Buy Underperform Rating, Seeing Amazon as 'Existential Threat'
Wedbush Securities has been “wrong on Best Buy,” and the company “may have the right formula for long-term growth,” said analyst Michael Pachter in a Monday investor note, but it held to its underperform rating for the retailer before its…
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Thursday fiscal Q1 earnings report, citing competitive pressure from Amazon. Wedbush is forecasting Q1 revenue of $8.65 billion vs. consensus of $8.73 billion, assuming domestic comparable sales growth of 1.5 percent vs. the retailer’s guidance of 1.5-2.5 percent. “We do not expect Best Buy’s stellar performance in FY:18 to continue in FY:19,” said Pachter, citing the benefit of an extra shopping week in the year-ago quarter, “the bankruptcy of a competitor, from troubles at other retailers, and from the mercy of competitor Amazon.” Best Buy’s partnership with Amazon (see 1804180027), in which Best Buy will be exclusive brick-and-mortar retailer of Amazon Fire TVs, could benefit Best Buy short term, “but we view it as an existential threat over the long-term,” said the analyst. Wedbush expects “the online juggernaut to ultimately revert to price competition at holiday,” which could compress Best Buy’s gross margins, Pachter said. The partnership also allows Best Buy to operate as a third-party seller on Amazon.com, which Wedbush sees as an Amazon strategy to convert Best Buy customers who don’t currently shop online. “We think any non-Prime members who purchase a Fire Edition smart TV at Best Buy are likely to sign up for Amazon Prime in the future in order to receive all of the benefits their Fire TV and built-in Alexa provide," he said. "Those customers will then increasingly shop at Amazon.com, at Best Buy’s loss." Wedbush is maintaining its FY 2020 estimates for Best Buy of $41.2 billion in revenue and earnings per share of $5.32, with growth expected to come mostly from “sharply lower federal income taxes and from aggressive share repurchases.”