Best Buy Stock: Oversold and Undervalued

Best Buy Co. (BBY) is an American multinational consumer electronics retailer.

I am bullish on the stock. (See Analysts’ Top Stocks on TipRanks)

Q3 Earnings

Best Buy managed to smash its third-quarter earnings expectations, beating on revenue and EPS by $290 million and $0.12, respectively.

During the quarter U.S. sales increased by 2% year-over-year versus the initial -1.3% consensus, and international sales also exceeded expectations with a 3% drawdown versus an estimated decrease of 5.3%.

These lean and negative numbers are due to the reduction in global disposable income; retail sales have normalized across the globe but still remain elevated as Best Buy’s year-over-year revenue growth remains 2.59x higher than its five-year average.

Looking ahead, the retailer’s management sees revenue coming in between $16.4 billion to $16.9 billion for the full year versus the previous consensus of $16.8 billion.

Value Drivers

By utilizing an omnichannel approach, Best Buy has managed to leverage its sales potential. Lately, the firm has focused on speeding up the integration of services such as pick up in-store and delivery; this has been tremendously successful, with same-day delivery orders having climbed 400% year-over-year.

Speed of money is the name of the game at the moment. Thanks to pandemic enforced digitalization, most things in the world are happening faster, and retailers should benefit in the long haul.

Further to the tangible part of the business’ progress is improvement in data and analytics. Companies are increasingly implementing modern data analytics techniques through machine learning features. Best Buy’s improved data analytics could see it flourish as operating costs will likely drop significantly as a result.

It’s an Oversold Stock

The stock has been oversold and is near the 30 RSI mark at 29.7. The RSI is usually a valuable metric to look out for “buy-the-dip” opportunities. An RSI of around 30 is usually considered oversold, and above 70 is deemed to be overbought.

Valuation Metrics

Best Buy stock is looking cheap at the moment. Its price-earnings ratio is at a 36.5% discount to its five-year average, while its price-to-sales and forward price-to-cash flow ratios are trading at sector discounts of 57.1% and 28.1%, respectively.

Best Buy also holds an astronomical interest coverage ratio of 95.6, introducing prominence to shareholders’ residual. Any debt that gets taken on from here on in will likely be seen as expansionary by the market, rather than a solvency issue.

Wall Street’s Take

Wall Street analysts are generally quite confident in Best Buy stock’s prospects. Out of 10 analyst ratings, there are five Buys, four Holds, and one Sell. The average Best Buy price target is $138.20, which implies 33% upside potential.

Concluding Thoughts

Best Buy stock is trading at a significant discount. Earnings growth should remain robust in 2022 with the firm’s pivot toward an omnichannel strategy and better data analytics.

Based on the RSI, the stock is nearly oversold and presents an “invest in the dip” opportunity.

Disclosure: At the time of publication, Steve Gray Booyens did not have a position in any of the securities mentioned in this article.