Best Buy surges on signs that the expected AI-driven PC and smartphone refresh is starting

Shares of Best Buy were popping Thursday as management made their case that an artificial intelligence upgrade cycle for personal computers and devices was starting to play out. Revenu e in the company’s fiscal 2025 first quarter fell 6.5% year over year to $8.85 billion in the three months ended May 4, missing the $8.96 billion expected by analysts, according to estimates compiled by LSEG. Adjusted earnings per share of $1.20 rose 5.3% on an annual basis and topped the $1.08 predicted by analysts, LSEG data showed. BBY YTD mountain Best Buy YTD Best Buy stock’s roughly 13% gain was all about what was said on the post-earning conference call about how consumers are going to want the latest and greatest AI features on their PCs and smartphones, which means more store and online traffic and more sales for the electronics retailer. Bottom Line This was a better-than-feared quarter from Best Buy. Though sales did miss the mark, both domestically and abroad, the company is running more efficiently than the Street was expecting as profitability results came in better than expected. Same-store sales came up short. But management said on the call that “gains in services and laptops” helped offset struggling categories such as appliances. Services, which include membership offerings, helped boost the company’s gross margin performance. Services are an area that Best Buy can lean into and leverage to differentiate from online retailers like Amazon . While Amazon can compete on prices and offerings, it does not have physical locations like Best Buy, making it difficult to compete in terms of the in-person customer experience, product setup, or technical support side of things. That’s not to say that Best Buy is sitting by idly in e-commerce, the company is making progress with its omnichannel experience, with CEO Corie Barry saying on the call that “fulfillment experience continues to improve, with almost 60% of our packages delivered or available for pickup within one day, and 40% of our digital sales are picked up in stores by our customers, with more than 90% of these orders available within just 30 minutes.” Best Buy Why we own : We took a position in Best Buy because we believe it will prove to be a go-to destination for consumers looking to upgrade hardware, much of which was purchased during Covid, to new AI-powered devices. Computer and mobile device lifecycles tend to be about four years, which is how far removed we are from the start of the pandemic when everyone was building out their home offices. In the meantime, we’re happy to stay patient as the thesis plays out thanks to the roughly 5% annual dividend yield. Competition : Target , Walmart , Amazon , Costco Most recent buy : April 30, 2024 Initiated : March 27, 2024 The health of the consumer remains a key watch item and that’s not unique to Best Buy. “Macro factors continue to fluctuate and put pressure on consumer spending,” Barry said. She goes on to state that “consumers continue to make tough choices with their budgets, trading down in some areas while still prioritizing spend in others like services and experiences like travel. This, in combination with the pull forward of tech purchases into the early years of the pandemic and lower levels of material innovation, has led to continued lower demand for higher-ticket consumer electronics and a focus on value and deals for current purchasers.” With that in mind, the team is still looking for new ways to enhance the customer experience and the Best Buy CEO remains confident that key categories will return to growth. She cited technological innovation, such as AI-enabled PCs, as a key catalyst. Computing and mobile phones accounted for 44% of Best Buy’s domestic sales in the quarter — 50% of international sales — making it by far the largest and most meaningful category for the company. Barry expects computing to benefit as the year progresses, thanks to AI-driven hardware replacements and upgrades. We, of course, agree with this view, especially given that we are now more than four years removed from the start of the Covid pandemic, a time when many people were building out home offices. PCs and mobile phones tend to have a lifecycle of about four years. While some may look to extend that, the temptation and justification for an upgrade will be easier this time around, thanks to the increased capabilities of machines built with AI in mind. “We have seen early signs of improvement as year-over-year comparable sales for laptops turned slightly positive in the fourth quarter, and that trend continued in Q1,” Barry said. Importantly, she noted that not only will Best Buy have the largest assortment of AI-enabled PCs but over 40% of that assortment will be exclusive to Best Buy. Going back to how Best Buy can compete with the likes of Amazon, Best Buy is working closely with vendors on marketing strategies and demonstrations to offer a “unique educational and interconnected digital shopping journey.” In another sign of how more powerful devices can drive foot traffic, Barry said the new M4-equipped iPads from Apple “are already contributing to improved sales trends this quarter.” While the reported results were mixed, it is the combination of better-than-expected profitability and signs that a large compute upgrade cycle, catalyzed by AI-equipped machines coming to market, is in the cards as we progress through the year. We believe that our primary investment thesis is intact, and therefore reiterate our buy-equivalent 1 rating and $95 per share price target. Guidance For fiscal year 2025, management said they expect to see sequential improvements in same-store sales results and are trending toward the midpoint of the targeted range. Nonetheless, the team believes that even at the midpoint of their same-store sales forecast, they can achieve an adjusted operating profit result towards the upper end of the targeted range, thanks to high gross profit margins on membership and service offerings. Full-year guidance, however, was left unchanged. Revenue of $41.3 billion to $42.6 billion, a hair ahead of the $41.94 billion estimate, at the midpoint, according to FactSet. Same-store sales of down 3% to flat, which is right in line with expectations. Adjusted operating margin of between 3.9% and 4.1%, also in line with the 4% consensus estimate. Adjusted earnings of between $5.75 and $6.20 per share, slightly below the $6.04 per share estimate, at the midpoint. (Jim Cramer’s Charitable Trust is long BBY, AMZN. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

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