Best Buy (NYSE:BBY) Takes a Hit Going Into Christmas

On the surface, this would seem to be the best possible time to buy in on Best Buy (NYSE:BBY). Pretty much the leading electronics retailer around, going into the height of the holiday season, it's a situation that seems tailor-made to buy in on big profits. So why did Goldman Sachs shift its rating on the company from “neutral” to “sell” despite being a big name in electronics going into the holidays? The reason may surprise you less than you think it will.

It's Great, But....

The Goldman downgrade likely came as a surprise, because these are prime conditions for electronics retailers. Moreover, these are prime conditions for electronics retailers run as well as Best Buy is. Goldman specifically noted that Best Buy is easily one of the country's best retailers, so issuing a downgraded recommendation might seem like some kind of dig at the company itself. However, Goldman took great pains to make clear that it wasn't knocking Best Buy itself. Rather, Goldman has a problem with Best Buy's share price.

Goldman pointed out that Best Buy's valuation, as well as some of its comps going forward, could be an issue, so it's suggesting investors sell. After all, things are looking good at Best Buy right now. Just a couple weeks ago, Best Buy noted that its same-store sales were up 23%, and that its online sales in the US nearly tripled, up 174% for the third quarter.

However, those numbers do come with some caveats; Best Buy wouldn't provide future outlooks, primarily because pandemic-related issues are still in play and have the potential to drag on the system. Given that the fourth quarter should be Best Buy's strongest—it incorporates several major holidays with a gift-giving focus, including Christmas, Hanukkah and Kwanzaa—a lack of guidance going in to such a phase is likely unnerving to investors.

Goldman Out on a Limb

The broader analyst community, based on our latest research, doesn't seem to be siding with Goldman's projections here, however. Not only is Goldman the only “sell” rating in our roster, but it's also the first time a “sell” rating has cropped up for the last six months. Currently, Best Buy has one “sell” rating—Goldman's—and nine “hold” ratings, along with 14 “buy” ratings. Even six months ago, Best Buy had a consensus “buy” on it with nine “hold” ratings and 12 “buy” ratings.

Meanwhile, the consensus price target has only been climbing as well, with six months ago's price target coming in at $86.90 alongside today's target of $109 even. Given that the company is currently trading at $102.14 as of this writing—and closed yesterday at $104.79—there may yet be some room for the company to run.

People Can Only Buy So Many Computers

Best Buy is indeed one of America's best retail operations. Its stores are replete with foot traffic, even these days, and as we saw just weeks ago, the online channel is running like a house afire. Thanks to the nature of its products, it's not likely to lose foot traffic completely, even with online sales; there are plenty of people out there—I'm on that list myself—that won't buy a television unless they can see what the picture looks like first. Trying to do that over a computer monitor is well-nigh impossible.

Yet here's the problem. We know Best Buy had a nice run in the second quarter, as the everything-from-home panic kicked in and people needed a computer immediately for video conferencing to help keep their jobs. We know that Best Buy had a nice run in the third quarter as the trend continued and people wanted to augment their home theater systems and the like. To suggest that the fourth quarter will be equally brisk may be a bridge too far.

Throw in the fact that Christmas this year looks like it will be abbreviated at best on several fronts and that's not exactly a recipe for big electronics sales. With unemployment benefits set to run out December 26, still-unsettled stimulus packages roiling around in a still-unsettled Washington, D.C., and most people have already bought their new hardware over the last six months, the need for or interest in buying electronic presents may be less than hoped for.

A pullback in Best Buy's operations and share price, therefore, isn't out of line. With so much electronics-buying front-loaded into 2020's second and third quarters, a disappointing fourth-quarter wouldn't be out of line. Neither would a drop in Best Buy's share price as a result.