Buy Better: Amazon vs Best Buy
About ten years ago, Amazon (NASDAQ: AMZN) was pulling all cylinders by drawing shoppers away from big box retailers like Best buy (NYSE: BBY). Amazon shoppers often used Best Buy’s sprawling stores as showrooms to test out products before purchasing them online.
In 2012, Best Buy CEO Brian Dunn resigned due to an inappropriate relationship with an employee, and the company’s stock price ultimately fell to around $ 12 a share. Back then, many investors thought Best Buy was doomed.
But Dunn’s successor Hubert Joly pulled Best Buy out of the abyss by fixing its faulty inventory systems, investing in better employee training, expanding its e-commerce services and embracing its reputation as a showroom. by leasing its floor space to big brands. .
Best Buy has also matched Amazon’s prices, used its physical stores to process online orders, and launched new in-store delivery and pickup options. Joly handed the reins to Corie Barry in 2019, but the foundation he built saved the retailer. Today, Best Buy shares are trading in the $ 120 range.
Best Buy stock has risen 60% in the past 12 months while Amazon stock is up about 35%. But can the big box retailer continue to outperform the e-commerce and cloud titan in the long run?
Best Buy continues to grow as other retailers retreat
Best Buy’s business has fewer moving parts than Amazon’s. Like other big box retailers, its growth can be tracked by comparable store sales, digital growth, new store openings and operating margins.
Best Buy’s revenue rose 8% to $ 47.3 billion in fiscal 2021, which ended in February. Its total comps grew 9.7%, supported by its whopping 144.4% growth in digital comps in the United States. Its adjusted operating margin fell from 4.9% to 5.8%, and its adjusted profit jumped 30%.
Best Buy attributed some of that growth to the pandemic, which has boosted sales of PCs and other consumer electronics. It also confidently increased its number of national stores from 977 to 991 locations, while increasing its number of international stores (in Canada and Mexico) from 166 to 168 stores.
Wall Street analysts expect Best Buy’s revenue and earnings to decline 1% and 8%, respectively, this year against more difficult post-pandemic comparisons. However, higher sales of televisions and home appliances, which are supported by higher new home sales, could help it exceed these conservative expectations.
Amazon’s core business still pulls all cylinders
Amazon generates most of its revenue from its online marketplaces and related physical retail businesses (such as Whole Foods and Amazon Go), but it generates most of its profits from Amazon Web Services (AWS), the most the world’s largest cloud infrastructure platform. .
The higher revenue from AWS allows Amazon to expand its Prime ecommerce ecosystem with low margin and loss strategies. Prime, which recently surpassed 200 million members worldwide, offers discounts, free shipping options, streaming media, and other perks in its ever-expanding walled garden.
Amazon’s total revenue grew 38% to $ 386.1 billion in fiscal 2020, which matches the calendar year. Its North American revenue grew 38%, its international revenue grew 40%, and its AWS revenue grew 30%. Strong revenue growth from its three main businesses offset higher expenses related to the pandemic and pushed its net profit 84% to $ 21.3 billion.
Amazon’s revenue rose another 44% in the first quarter, as its net profit more than tripled from its pandemic-hit profits a year ago. Analysts expect its revenue and profits to grow 27% and 33%, respectively, for the full year, as its growth slows slightly in a post-pandemic market.
The evaluations and the verdict
Best Buy trades at just 16 times forward earnings and pays a 2.2% forward dividend yield. This low valuation and decent yield could make it an attractive stock, as higher bond yields trigger a rotation from growth to value.
Amazon trades at 44 times forward earnings and does not pay a dividend. But its forward-looking P / E ratio remains reasonable relative to its growth rates, and the symbiotic relationship between AWS and its retail business arguably makes it stronger than traditional retailers. This virtuous cycle is expected to continue long after CEO Jeff Bezos leaves later this year.
Therefore, I think Amazon deserves a higher multiple than Best Buy, which is a strong retail survivor, but arguably not as appealing as stronger returns like Target. Meanwhile, Amazon remains in a class of its own and is still expected to outperform Best Buy and many other retailers in the long run.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.