Earnings outlook | standing on the front line of metaverse, can best buy have a “first taste of soup”?

By the black sheet

Compilation of Wall Street events

Summary & gt& gt;& gt; Best buy will benefit from the metaverse industry as consumers try on VR headphones and glasses in stores. The totaltech subscription program will increase customer stickiness and drive sales growth in the coming years.

I believe that best buy company has potential growth opportunities because of its undervalued stock market.

As consumers’ interest in metaverse related technologies increases, best buy should benefit from the face-to-face shopping trend realized in the next few years. This is mainly out of curiosity about virtual world products such as virtual reality headphones and glasses, and consumers are more interested in trying on products in person.

Best buy’s new totaltech subscription program should improve customer loyalty and stickiness. Subscriptions are not cheap, priced at $200, but members have access to a wide range of products, including industry-leading transactions and 24×7 geek square technical support (free).

I believe that the value of subscription far exceeds the cost, which will greatly increase future revenue. Best buy’s stock is very cheap on the basis of multiple and absolute valuation. My DCF calculation reflects the rising space of 14% of the current level.

01

Standing on the front line of metaverse

Most people think of metalovers and metalovers’ investment opportunities immediately.

Although I believe there are many opportunities in the whole market, best buy is a potential beneficiary that is often overlooked. It can benefit a lot from the new digital world – because metaverse is in its early stage, consumers will prefer to shop in person when exploring meta related products.

Best buy is directly involved in the sales of these products, which can be seen from the revenue portfolio of the following companies:

百思买2021年收入组合 best buy 2021 revenue portfolio

76% of best buy’s revenue in 2021 comes from the sales of computing / mobile phones and consumer electronics. The company has the right to sell the products of metaverse related companies such as apple, meta, Microsoft and Sony, which will launch their products at best buy when new products are released.

Given that supply chain problems still exist and the demand for new consumer technology products remains strong, best buy’s long-term partnership will give them priority to launch new products in best buy.

We saw this last holiday season, when the demand for ps5 soared and the system was reserved for members of the totaltech program. According to loop capital, best buy will “increase demand as more and more consumers flock to buy newer products”. Loop’s target price for the stock is $150, up 50% from current levels. Although my upside scenario is only 14%, I agree with bullish sentiment.

Best buy’s totaltech subscription costs $200 a year, but it will drive customer loyalty to the app in the future.

Totaltech会员的产品(百思买) products of totaltech members (best buy)

Although this may seem expensive to some people, the value it brings to customers far exceeds the cost in my eyes. Members can enjoy the exclusive discount of substantial price reduction and the unlimited free service provided by geek square. The following is an example of such a transaction I found on best buy’s website.

30%折扣百思买有线耳机 30% discount best buy wired headphones

With the increase of product supply, low prices in these industries will promote the demand for best buy. I also believe that customers who buy Yuanjie related products for the first time will want to personally explore their choices, which makes it a double tail catalyst of best buy.

As long as best buy continues to offer low prices and maintain its discounts, I believe customer loyalty will increase the company and bring viscous income to the future.

02

Totaltech innovation increment

In terms of financial performance, best buy has delivered. Here is a chart of best buy’s revenue and profit margin over the past few years:

Driven by increased spending on technology products and same store sales, total revenue has increased by about 22% since the pre epidemic level.

The profit margin has expanded, especially in terms of net income, with an increase of 73.83%. EBITDA margin is also very healthy, with an increase of 46.80% since the pre epidemic level. Although the stock performed well during this period, rising by 70.50%, its share price has fallen sharply from an all-time high.

Compared with best buy’s peak in December, the share price is down 27%. I believe it’s time to keep an eye on the stock.

In terms of best buy’s financial position, the company’s balance sheet is strong. The company has sufficient liquidity with a current ratio of 1.13 and cash of $3.47b, which is almost enough to repay its debt burden of $3.98b.

Inventory increased from $6.42b to $8.5b, and Q / Q increased by 33%, indicating that the company is well managing supply chain problems and reserving for the increased demand caused by the pandemic. Unrealized revenue increased by 12% from $1.23b to $1.37b, which will flow into future earnings.

Given that I am very optimistic about the launch of best buy’s totaltech subscription, I expect unrealized revenue to grow in the next few years and the company will earn more revenue.

In terms of valuation, based on DCF’s valuation, I assume that the revenue will grow at a CAGR of 2% in the next five years, while the market generally believes that the five-year CAGR is 1.16%.

共识收入估计 consensus revenue estimate

This revenue growth will be supported by the company’s healthy profit margin, which has increased since the pre epidemic period (as mentioned earlier).

My assumptions about free cash flow and EBITDA can be seen in the following model. The number of outstanding shares is only 224.78 million, compared with 246.5 million at present, because I believe the company will continue to repurchase shares, thereby reducing the total number of outstanding shares.

BBY DCF BBY DCF

The implied increase is about 14% and the fair value is US $116.50.

Finally, competitor analysis: Best Buy’s main competitor is Amazon, which is larger and more professional in the field of e-commerce.

I’m not worried that Amazon will pose a threat to bestbuy because best buy’s value-added is through providing consumers with a face-to-face experience. Consumers will prefer this way of shopping, especially the launch of products related to metaverse, because they are new and little-known.

Demonstrating the function of products is very important for these products, which also makes best buy flourish. The main risk faced by my valuation is the shift of demand from best buy to large enterprises such as Amazon. Due to best buy’s personal experience, I don’t expect this to happen.

Overall, best buy should benefit from the release of metaverse related products to supplement revenue growth in the coming years. I expect this growth to flow to the bottom line because the company has historically managed its profit margins well and will continue to do so.

The share price has fallen by about 27% from the historical high. I think it’s time to be bullish and increase our stock holdings. My DCF model shows that the stock has about 14% upside space, which is a considerable return as investors experience a turbulent market period.

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