Best Buy Stock Analysis: Sell This Dinosaur

| About: Best Buy (BBY)

Best Buy (NYSE: BBY), as we know it, is finished. It is high time to sell this dinosaur and never look back. Web 2.0 has the Best Buy business model under siege - to the point where this Minnesota retailer is doomed to Circuit City irrelevance. Next year, grandpa will gas up his '72 Chevelle, head to the suburbs, and roam empty Best Buy aisles searching for eight tracks and that DVD thing-a-ma-jigger. Today marks a day of reckoning for us '80s babies, as we grew up with this stock, but we must now all be forced to acknowledge our own maturity alongside the slow motion train wreck death of Team Blue Big Box.

Best Buy Business Model Going Extinct

In the Web 2.0 era, Best Buy is little more than a showroom. Best Buy is now an amusing break from suburbia and yuppieville errand running, as consumers enter its doors to test drive hot products and gadgets, before returning home and turning on the computer. Savvy consumers are simply logging on to Amazon (NASDAQ: AMZN), eBay (NASDAQ: EBAY), and various niche Web 2.0 sites to chase deals and freeze Best Buy and municipal sales tax coffers out of any real cash. Best Buy -- with its stodgy warehouse leases, outdated inventory control, and expensive employee benefits, cannot compete with the online machine on price.

E-commerce continues to grow exponentially, as evidenced by a Standard and Poor's report estimating that online sales will double and account for 10 percent of all retail revenue within the next decade. In 2011, Amazon, the world's largest online retailer booked $48 billion in sales revenue, on 34 percent average annual growth between 2007 and 2011. Best Buy, however, will remain stalled at $45-$50 billion in sales well into the near future. As a sign of the times, Amazon is one pace to be a top-10 world retailer within five years, while Best Buy slides deeper down the depth chart toward Radio Shack oblivion.

On the ground, Apple (NASDAQ: AAPL), Wal-Mart (NYSE: WMT), and Costco (NASDAQ: COST) will only add to the damage.

In Chicago, hipsters shun Best Buy and its tattered '90s carpeting, in favor of the neighboring Apple Store and its clean lines, open floor plan, and interactive shopping experience. Certainly, it must feel like a slap in the face, for Best Buy brass to observe potential customers enter their stores, fiddle with a Mac, and head next door to spend $2,500 at the Apple Store on North Avenue. At the opposite end of the spectrum, dowdy Wal-Mart and Costco are also in on the act, as Joe Six Pack and his wife load their one-stop shopping cart with cut-rate macaroni and cheese, thermal underwear, two flat panel televisions, and one new smartphone.

The consumer has spoken - with both his Web 2.0 connection and his wallet.

With a series of scathing 2011-2012 articles and forum posts, irate consumers have taken to the web - to blast Best Buy for its aggressive selling practices, confusing store lay outs, Byzantine web presence, and maddening inability to fill orders during the Holiday Season. In response, then CEO Brian Dunn took to the blogosphere to post long-winded rants and defend his company. He was promptly ridiculed, fired and ostracized from the business community - beneath a sordid cloud of Best Buy internal allegations.

Consumer Electronics Product Cycle

The bottom of the consumer electronics product cycle could not have come at a worst time for Best Buy and its shareholders.

Does anyone even buy CDs anymore?

The compact disc is now a relic, as we have all toyed with CD burners, Napster, mp3 technology, and Apple iTunes over the past decade. According to Nielsen data, more than half of all music sales were made digitally in 2011. As recently as 2007, CDs accounted for 90 percent of total music industry purchases, and the Best Buy sales floor was fully stocked with racks upon racks of rap, country, rhythm and blues, and rock albums. Today, these sweeping selections have been condensed and shoved into a bargain bin of Barry Manilow show tunes and Kenny Rogers' Greatest Hits right next to the register.

For the Best Buy of old, cheap CDs were bait and switch items - promoted to lure prospects into stores and set them up perfectly for the hard sell and big-ticket purchases. At present, plastic music and empty space are ideal metaphors to mock a former star that remains trapped in the 90s and has lost its way.

Beyond the CD bargain bin, gamers, techies and gadget geeks have had their fill of this generation's Microsoft X-Box 360, notebook computers, smartphones, and cameras that can all take pictures, connect to the Internet, fire up Madden, and stage controlled arcade shoot-outs with bad guys. In the back, traffic within the home theater and appliance sections is down to a trickle, as Case-Shiller data reveal a weak property market that continues to decline in the aftermath of the 2007 credit debacle.

Who is going to upgrade from a 720p to a 1080p LED flat panel television - when his home is in danger of foreclosure?

Best Buy Admits Defeat

Between 2006 and 2012, Best Buy shares have collapsed from $55 to $22 - for a brutal 60 percent loss. During this time, net income has declined slightly from $1.38 to $1.28 billion and the stock trades at nine times earnings. At these levels, Best Buy supporters may reason that the stock is "cheap" and double down, while citing $1.19 billion worth of 2011 operating cash flow. (Cash flow includes one-time $1.36 billion charge to purchase CPW interest in Best Buy mobile).

I would counter, however, that investors in search of robust cash flow and minimal earnings growth should stick to utilities. Utilities, at least, pay out solid dividends and offer stable value as local monopolies. Alternatively, a reeling Best Buy may cut or eliminate its dividend altogether, as it goes the way of the Kenmore shopping catalogue.

Yes, Best Buy's management team has already picked up the white flag for surrender. In Dunn's final curtain call, the beleaguered chief announced plans for Best Buy to fire employees, downsize its international presence, abandon 50 big box stores, and slash $800 million in costs. In place of the traditional Big Box footprint, Best Buy will transition its focus toward smaller boutique locations that offer mobile services, quirky devices, and high-margin warranty plans.

Do we really need another Radio Shack?

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