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Betting On Best Buy Over Amazon

Saj Karsan profile picture
Saj Karsan

Best Buy (NYSE:BBY) and Amazon (AMZN) appear to be companies headed in different directions. While Amazon has seen steady revenue and earnings growth over the quarters and over the years, Best Buy's revenue has been flat, with its earnings actually declining.

But what makes a stock attractive is not simply the trajectory of the results of the underlying business. If this were the case, stock prices wouldn't matter, as a growing business would be a "buy" at any price. In the cases of Amazon and Best Buy, the stock price differences between these two companies have become so extreme that it has become highly likely that Best Buy stock will outperform that of Amazon in the coming quarters and years.

To see why this is so, consider what the investor in each of these two companies is getting for his investment dollar. A $1 investment in Amazon at today's price yields just one penny in earnings. On the other hand, a $1 investment in Best Buy today gives the investor a whopping (by comparison) fifteen cents in earnings.

Of course, those earnings are subject to change. But the difference in earnings yield is so large that even monumental events are unlikely to completely close this gap. For example, even if Amazon doubles its earnings somehow (which is extremely difficult to do; as it is, Amazon has required the last four years to manage that), the investor is still only receiving two cents for every dollar of investment. And that's only if things go really well!

On the other hand, the shareholder in Best Buy doesn't need anything dramatic to happen for him to make money. Even if the company's earnings decline in the coming years, he will likely do just fine. That fifteen cents is not being wasted on investments with uncertain returns; instead, it is

This article was written by

Saj Karsan profile picture
Saj Karsan founded an investment and research firm that is based on the principles of value investing. He has an MBA from the Richard Ivey School of Business, has completed all three CFA exams, and has an engineering degree from McGill University. Visit his blog, Barel Karsan (http://barelkarsan.com/).

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Comments (15)

1red profile picture
16 Sep. 2011
got 9% return on BBY in the course of a few days simply on buying on massive fear. wondering if I should just take such a wonderful quick profit or not.

the author is making a statement that best buy is good for the price. i think the people arguing the economics of both companies, independent of the price, are missing the point. he isn't trying to say that bby is better than amazon as a business.
J Mintzmyer profile picture
If 9% was your target upside, than sure. I think BBY can easily double over the next year, while AMZN belongs well under $100.

That's my target.
krk profile picture
15 Sep. 2011
Here is a more balanced and better informed analysis of BBY vs. AMZN

Amazon, Invading Consumer Electronics, Thrashes Best Buy – And Itself

Key takeaway: "It could be that neither is a buy. Best Buy is spending its cash buying in shares, apparently in hopes of propping up the price. But with its fortunes in decline, absent a robust turnaround those purchases may end up looking pricey rather than cheap.
And even if Best Buy eventually went the way of Circuit City, it seems unlikely Amazon would enjoy a period of reduced competition. Opening a consumer electronics store just seems to be in the blood of many American entrepreneurs. Many old Circuit City stores are already being snapped up by smaller, ambitious chains. It could be that Amazon is doing to consumer electronics what it already did to the retailing of books: making the business permanently less profitable for everyone involved.
Good for consumers, but a tough sector to be an investor in."
Paulo Santos profile picture
Is AMZN trashing BBY or quite the contrary?

The evidence is that AMZN's earnings are lower, and falling faster, than BBY's. Were these trends to persist, and AMZN would go out of business BEFORE BBY.
krk profile picture
14 Sep. 2011
Saj, I was hoping you would respond to two of GeralThinkfn's comments above on your promoting the mythology of "..While Amazon has seen steady revenue and earnings growth over the quarters and over the years.." or at least save face by putting a respectable spin like other Amazon "analysts".
J. A. Saglimbeni profile picture
Best Buy = Crazy Eddie,Topps, Nobody Beats the Wiz, Circuit City---which basically means that it has no moat and will probably go out of business. AMAZON=Moat, growth, pricing power and the future. Crap is Crap---Best Buy is value crap---just like DELL, MSFT, HPQ, and CSCO. I AM LONG THE BEST RETAILOR--AMZN.
J Mintzmyer profile picture
Good luck with those valuations. I'll take all that "value crap" any day over AMZN.
J. A. Saglimbeni profile picture
Hmmm, I guess you are one of those investors that do not like making any return on your money. I invest-so my invesment makes me a return--compare AMZN to any of these value plays for the last year, five years, and ten years----you worry about making a total of ten to twenty percent for the last ten years and I will keep making hundreds and hundreds of percentages over the years. Amazon is in a growth cycle and is dominant during this "Great Recession"---nuff said.
J Mintzmyer profile picture
@Joe, best of luck- I honestly hope that continues to work for you. Just remember that past returns are no guarantee of future returns. I'll take the performance (fundamentally) solid company any day over a hype stock.
Relic37 profile picture
Lets just consider Best Buy, and purchasing a TV.

My first TV had a power cord and a place to connect an antenna. Now, setting up a new television has become more complicated than Chinese calculus - trying to figure out how to connect an older sound system and cable box, determining which connection cords you have, and which ones you now need because the old cables (S-video for instance) have no home on the new TV. And most of the sales help at Best Buy really have no way of knowing exactly how each and every TV they sell is configured. A large part of this problem goes back to the television manufacturers and their lack of standardization. Throw in a heavily promoted, but totally undemanded "3D ready" feature, and the consumer is in a very unfriendly environment. Amazon's customer reviews permit you to ferret out problem products early on, and avoid them.

Best Buy should put much better printed information with each TV displayed, and have sales-help equipped with iPads that can immediately produce ALL relevant information for each TV, so the consumer is completely informed. As complication has increased, knowledgeable sales staffing has decreased. If Best Buy wants to sell more TVs, they need to give people a compelling reason to trade there, and assuming the price is competitive, better information might just be the ticket.
Paulo Santos profile picture
Saj, it would be important not to continue to spread the lie that AMZN's earnings are growing. That's contributing directly to a mass delusion that's been underway for some time now.

AMZN's earnings are DECLINING, and are declining faster and FASTER.
J Mintzmyer profile picture
Agreed- I just wrote my take on BBY as well. The buyback plans and Chinese growth are very encouraging!
Rookie IRA Investor profile picture
Best Buy is probably still affected by the housing market. With new home construction still at a standstill in many states, the market for washers, dryers, new TV's, kitchen radios, food processors, and other household electronics MUST be affected and could make that few cents a share difference that the analysts look for.
Paulo Santos profile picture
Saj, you're wrong about AMZN growing earnings steadily - this year, AMZN's earnings are FALLING a lot MORE than BBY's.

Whereas BBY's fell 30% in this Q and are expected to stagnate for the year, AMZN's will fall around 50% this Q and are expected to fall 20% for the year.
gnuman profile picture
I believe that BBY has been hammered a bit too much in its stock price. It would be best if BBY could improve on the service side of things as well. Service doesn't cost much and would improve margins significantly (now if they would only stop doing stupid things that I read about on other websites)

I'm in the OCT $24 calls and believe the price should go back to $25-26 range
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