Electronics retailer Best Buy Co. Inc. (BBY), a company pegged as one of Amazon.com Inc.'s (AMZN) many victims in the brick-and-mortar space, has seen pressure lighten up on the announcement of a new deal with the online shopping behemoth. Yet one team of analysts on the Street is doubtful that a deal to sell the Seattle-based retailer's new line of smart televisions will amount to anything but a short-term win for Best Buy. Instead, bears at Wedbush Securities expect the alliance to ultimately squeeze the physical retailer in the long term as Amazon successfully converts would-be in-store shoppers to its online store, as reported by Barron's. (See also: Best Buy Reports Earnings After an All-Time High.)
Trading down about 0.2% at $75.32 on Wednesday, shares of the Richfield, Minnesota-based retailer reflect a 9.9% increase year-to-date (YTD) and a 46.1% gain over 12 months, hovering below their 52-week high of $79.90. For comparison, the S&P 500 has returns 1.7% YTD and 13.4% over 12 months, while Amazon stock has grown 34.5% and increased 62.4% over the same respective periods. Best Buy's outperformance relative to the broader market can be attributed to rising optimism on the Street regarding its ability to escape the damage Amazon typically inflicts on rivals, as well as a handful of new initiatives such as an emphasis on services including a $200 annual subscription for unlimited Geek Squad support for all products in home, the addition of price-matching and the fortunate shutdown of competitor stores.
Amazon Deal May be Short-Lived
In mid-April, Best Buy announced a partnership with Bezos' "everything store" in which the company became the exclusive brick-and-mortar sales channel for a new line of TVs equipped with Amazon's Fire TV streaming video capabilities and the artificial intelligence (AI)-powered Alexa voice-assistant technology. For Amazon, the partnership offers access to a broad distribution of physical stores, where most of the shopping continues to take place despite a rapid shift to online retail.
Offering new exclusive products is viewed as helping Best Buy ramp up foot traffic, similar to other deals with Amazon such as a partnership in 2017 in which Best Buy showcased Amazon Echo and Alexa products inside 700 brick-and-mortar locations. Some have speculated that Amazon could potentially acquire Best Buy, creating a combined entity that would control between 40% to 50% of the consumer electronics market in the U.S.
“We think that Amazon’s magnanimity may be short-lived, and expect the online juggernaut to ultimately revert to price competition at holiday, which may compress Best Buy’s gross margins,” said Wedbush Securities analysts in a research note Monday, as cited in a Barron's story dated May 21.
Partnership to Convert In-Store Shoppers to Online Realm
As Amazon leverages its partnership with Best Buy to expand its market share, it could cost the electronics retailer more than 36% of its value, according to the investment firm. The analysts maintained their underperform rating on BBY and set a 12-month price target of $48.
“We view this as an attempt by Amazon to convert the segment of Best Buy’s customer base that does not currently shop online,” wrote Wedbush. “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. Those customers will then increasingly shop at Amazon.com, at Best Buy’s loss.”
Amazon has shown its willingness to shell out a significant amount of cash in new markets, risking short-term losses for potential long-term revenue gains as it rivals leaders across industries such as grocery, apparel and health care with its major cost advantages and economies of scale. (See also: Best Buy Has ‘No Reason to Exist’ in Amazon Age: Wedbush.)