Consumer electronics insiders are hoping that 3D TV adoption will goose their industry’s revenues and profit margins. “If recent buying patterns are any indication, consumers may make a mad dash to replace their current TVs with 3D-capable ones as the new technology matures,” tech sales executive Jeff Davis gushed recently in Twice magazine, a consumer electronics trade.
To what extent will Best Buy (NYSE:BBY), the country’s largest consumer electronics retailer, benefit from this trend? Not much, in our opinion. The same goes for competitors like Amazon (NASDAQ:AMZN), eBay (NASDAQ:EBAY) and Wal-Mart (NYSE:WMT).
Why are we bearish on 3D? Boosters like Davis assume that TV watchers will embrace 3D as they did HDTV, the last major breakthrough in TV technology. But there are several reasons why this confidence could be misplaced. Our analysis follows below.
3D TV is not HDTV all over again
Compared to conventional flat-panel TV sets, 3D sets are much more expensive and yield higher profit margins. In theory, mass adoption of 3D TV would increase Best Buy’s revenue per square foot and profit margins, which in turn would lift the company’s stock.
You can drag the trend-line in the charts below to create your own revenue per square foot and gross margin estimates, respectively, for Best Buy, and see how they impact the company’s estimated stock price.
Here’s why we’re skeptical. Consumers flocked to HDTV because of falling set prices and the massive volume of HD content available from pay-TV service providers like Comcast (CMCSA) and Time Warner Cable (TWC). Demand naturally skyrocketed, boosting HDTV adoption rates to about 50% of U.S. homes by the end of 2009.
But 3D TVs can cost nearly twice as much as comparable HDTV sets. They require additional spending on accessories like 3D glasses, and have been linked to unpleasant side effects like strokes and epileptic seizures in some viewers. We expect these factors to limit consumer demand for 3D TVs for the foreseeable future. Consequently, Best Buy’s upside from this technology could be limited.
Even if we’re wrong, 3D probably won’t move Best Buy’s stock
About 20% of Best Buy’s annual sales come from TVs. Let’s assume, optimistically, that 3D TVs constitute 25% of Best Buy’s total TV sales by the end of the Trefis forecast period. In this scenario, incremental cash flows from higher pricing and gross margins for 3D TVs would create a limited upside of about 3% to 4% for the company’s stock.
Best Buy’s stock could soar by more than 15% in the unlikely event that 3D technology powers 100% of all TVs sold by the end of the Trefis forecast period. We’re not holding our breath.
Disclosure: No positions