As the four-year, post-COVID replacement cycle nears and as industry trends paint an upbeat outlook to the consumer electronics segment, Best Buy’s (NYSE:BBY) stock price could surpass $95 as a return to positive comparable sales fueled by the offering of AI-enabled PCs will likely act as a catalyst for shares.
DA Davidson analyst Michael Baker dismissed the recent underperformance of Best Buy (BBY) relative to the S&P 500 and considers the stock the “best performing” of DA Davidson’s 14 Retailing/Broadlines & Hardlines names.
The 4-year PC replacement cycle from COVID-19 lockdowns and social distancing trends in computer purchases occurs this year, making 2024 an even more fortuitous time for retailers given the launch of a new AI-driven product line at Best Buy (BBY). The line includes 40 new Microsoft (MSFT) Co-Pilot enabled SKUs across different hardware brands, 40% of which are exclusive to Best Buy (BBY).
“We believe the biggest reason for the rebound in PC data over the last six months is simply the nature of product cycles, which is typically about 4 years for these products,” Baker said.
And data points cited by DA Davidson’s Baker show that consumer electronic trends are improving, led by demand for new PCs. Fourth quarter 2023 industry data showed the first increase in worldwide PC shipment data on a year-over-year basis since the third quarter of 2021. This trend accelerated in the first quarter of this year with a 1.5% increase. DA Davidson data shows a “strong correlation” between this data stream and comparable sales from Best Buy (BBY) for both total merchandise and their computing segment, which accounts for 42% of sales.
Separate industry data supports Baker’s thesis that AI-enabled PCs will drive sales for retailers like Best Buy (BBY).
Tech research firm Canalys projects that one in five PCs shipped in 2024 will be AI-capable, translating into 170M AI-capable PCs, of which Best Buy (BBY) is gearing up to sell a “significant” number.
“We are, as you can imagine, arming ourselves on every angle to be the single best place to come experience this,” Best Buy CEO Corie Barry said in an interview with CNBC’s Jim Kramer. And in the company’s most recent earnings call with analysts, Barry talked about the “exciting things happening” in the computing category.
“We expect the category to benefit as early replacement and upgrade cycles gain momentum, and new products featuring even more AI capabilities are released as we move through the year,” she said, adding that, the company has seen “early signs of improvement as year-over-year comparable sales for laptops turned slightly positive in Q4 and continued in Q1.”
DA Davidson is not the only recent Wall Street firm to jump on the Best Buy (BBY) bull train. BofA Securities recently delivered a double-upgrade to Buy from Sell noting a positive inflection point for same-store sales driven by laptop purchases, accelerated by AI adoption, a sentiment echoed by UBS.
There are risks, however, to this rosy outlook for the company, not least of which is the current economic situation. DA Davidson’s Baker cautions that decreasing employment trends pose a risk to sales as retail sales and employment trends are positively correlated.
Additionally, increased online sales from competitors could impact margins. “From a competitive standpoint, increased ecommerce sales from online only retailers could lead to market share loss, or lower margins as price visibility necessitates a greater focus on value for the consumer,” Baker said.
Fortunately for Best Buy (BBY) customers still prefer in-store shopping. Best Buy’s online revenue as a percentage of total sales dropped to 30% from 40% as brick-and-mortar stores still presented a more attractive option to shoppers while online prices remained competitive to Amazon (AMZN) and Walmart (WMT).