Seeking Alpha
Bonds, dividend investing, income, retirement
Profile| Send Message|
( followers)

The last few years have been difficult for big box retailers as shopping online becomes more popular. Amazon.com (NASDAQ:AMZN) has been able to monetize on this trend, as it is considered the largest online retailer. The company's market capitalization is $84 billion.

Best Buy (NYSE:BBY), which is the largest big box electronics store, currently has a market cap around $9 billion, so around 1/10 the size of Amazon. While Amazon specializes in everything from groceries to electronics, Best Buy is mainly electronics.

Big box is seen to be a dying breed. Many big box retailers are doing poorly lately. Take for example Sears Holding (NASDAQ:SHLD), which recently announced it would close up to 200 underperforming stores. The company does not even generate free cash flow.

So why is Best Buy better than Amazon? First of all the company is very profitable compared to Amazon. Last quarter, Best Buy earned over $200 million, while Amazon earned $177 million. Keep in mind that Amazon's market cap is 10 times that of Best Buy. Not to mention that Amazon is a much more diversified company.

Last quarter, Amazon's revenue was $17.4 billion, while Best Buy had revenue of $12.13 billion. So what does this tell us about margins? Best Buy seems to be keeping more money from each dollar of revenue. The issue with the market is that they are scrutinizing Best Buy due to its margins. However, what investors and analysts fail to see is that Amazon has margins that are much worse.

Speculation fever has hit Amazon strongly, and there is belief that the company will grow revenue heavily. This doesn't mean much if they are growing revenue, when margins are taking a hit.

Amazon has a forward P/E of 69 and Best Buy has a forward P/E of 6.8. The important thing to note is that even though Amazon reported revenue below estimates it still commands a high valuation. Best Buy, on the other hand, was in line last quarter, yet the stock is still being traded as if it is going out of business.

Will online shopping continue to grow? Of course, but not nearly enough for Amazon to justify such a valuation. Keep in mind, Amazon has fairly poor margins as well. They are trying their best to make the new line of Kindles mainstream and hoping to profit from the sale of their online books.

The razor-razor blade model sounds good, but only works when there is little competition. However, when you throw in Barnes and Noble's (NYSE:BKS) Nook and Apple's iPad that have the same capability, it doesn't really matter too much.

I recently saw a commercial about how it makes more sense to buy a Kindle and Kindle Fire rather than buying an Apple (NASDAQ:AAPL) iPad. What's wrong with this commercial is that it doesn't make any sense. I would rather carry one iPad than two or three Kindles. Also, an iPad has much better features than a Fire does. Apple also has many more apps as well. So comparing the two based on price alone is not reasonable.

My point being is that if the market is pricing Amazon based on its future growth potential of the Kindle, then investors may want to sell. Best Buy is a big box retailer, but it nearly has a monopoly on the electronics big box market. I believe its a better buy based on valuation and an inaccurate perception of its future.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Why Best Buy Is A Better Pick Than Amazon