Best Buy Is The Best Way To Play The Metaverse – Seeking Alpha

Thesis

I believe Best Buy (BBY) shares are being undervalued by the market due to the potential growth opportunities the company has in accordance with the metaverse. As consumer interest increases in metaverse-related technology, Best Buy should benefit as a result of in-person shopping trends materializing in the coming years. This will mainly be driven by curiosity about metaverse products such as VR headsets and glasses, with consumers being more interested in trying on products in person. Best Buy’s new Totaltech subscription program should increase customer loyalty and stickiness. The subscription is not cheap, with a $200 price tag, but grants members access to a plethora of offerings including industry-leading deals and around the clock Geek Squad tech support (for free). I believe the value of the subscription far exceeds the cost and this will also materially increase revenues moving forward. Best Buy shares are cheap on both a multiple and absolute valuation basis, and my DCF calculations reflect 14% upside from current levels.

Benefiting From The Metaverse

When assessing investment opportunities within the metaverse, most people immediately think of companies such as Meta (NASDAQ:FB), Unity Software (NYSE:U), and Roblox (NYSE:RBLX). While I believe opportunities are abundant across the market, Best Buy is a sleeper with plenty to gain from the new digital world. Because the Metaverse is in its early innings, consumers will be more inclined to seek in-person shopping as they explore metaverse-related products.

Best Buy is directly involved with the sale of these products, as we can see from the company’s revenue mix below.

76% of Best Buy’s revenue in 2021 came from the sale of computing/mobile phones and consumer electronics. The company has the rights to sell products from metaverse-related companies such as Apple (NASDAQ:AAPL), Meta, Microsoft (NASDAQ:MSFT), and Sony (NYSE:SONY) which will be pushing out their products upon new launches. Given supply chain issues persist, and demand remains strong from new consumer tech offerings, the company’s longstanding partnerships will give them priority for new goods. We saw this last holiday season, when demand skyrocketed for the PS5 and systems were reserved for members of the Totaltech program (yes, the $200 one). According to Loop Capital, Best Buy will have “an increase in demand as more consumers flock to buy updated products.” Loop has a $150 Price target on the stock, representing 50% upside from current levels. While my upside scenario is only 14%, I agree with the bullish sentiment.

Increasing Customer Loyalty

Best Buy’s Totaltech subscription costs $200 annually which should drive customer loyalty into the future. Below you can see all of its perks.

While this may seem pricey to some, the value it adds to customers far exceeds the costs in my eyes. Members gain access to exclusive deals with prices that are seriously marked down along with unlimited free service from Geek Squad. Below is an example of such a deal I found on Best Buy’s website.

As product offerings increase, these industry low prices will drive demand to Best Buy. I also believe that first-time customers shopping for metaverse-related products will want to explore their options in-person, making this a two-tail catalyst for Best Buy.

As long as Best Buy continues to deliver low prices and maintains its perks, I believe customer loyalty will increase for the company and drive sticky revenue for the future.

Financial Performance

In terms of financial performance, Best Buy has delivered. Below is a chart of Best Buy’s revenues and margins over the past few years.

Total revenue is up ~22% since pre-pandemic levels, driven by increased spending on tech products and same store sales. Margins have expanded, most notably in net income, growing 73.83%. EBITDA margins are healthy as well, up 46.80% since pre-pandemic levels. While the stock has performed well over the period, up 70.50%, shares are down sharply from all-time highs.

With shares off 27% from Best Buy’s December peak, I believe it is time to be opportunistic on the stock.

In terms of Best Buy’s financial standing, the company’s balance sheet is strong. The company has ample liquidity with a 1.13 current ratio and $3.47B of cash, nearly enough to service its entire debt load of $3.98B. Inventories increased 33% Q/Q from $6.42B to $8.5B, showing the company is managing supply chain issues well and stocking up for increased demand coming out of the pandemic. Unearned revenue increased 12% from $1.23B to $1.37B, which will flow to future earnings as performance obligations are met. Given I am very optimistic about Best Buy’s Totaltech subscription rollout, I anticipate unearned revenues to grow in the next few years and revenues are earned as performance obligations are met by the company.

Valuation

My DCF-based valuation assumes that revenues increase at a 2% CAGR over the next 5 years compared to the market’s consensus 1.16% 5-year CAGR.

This top-line growth will be supported by the company’s healthy margins which have increased since the pre-pandemic period (as mentioned previously).

My assumptions for free cash flow and EBITDA can be seen within the model below. Shares outstanding are only 224.78M versus the current 246.5M as I believe the company will continue repurchasing shares, shrinking the total outstanding.

The implied upside move is ~14%, with a fair share value of $116.50.

Competitors / Risks

Best Buy’s main competitor is Amazon (NASDAQ:AMZN), which is much larger and more specialized in e-commerce. The reason I am not worried about Amazon is because Best Buy’s value-add is by offering an in-person experience. Consumers will gravitate toward this way of shopping especially for metaverse-related product rollouts as they are new and less known. Demoing products will be critical for these products and Best Buy is set to thrive as a result. The main risk to my valuation is demand shifting away from Best Buy to larger players like Amazon. I do not anticipate this happening due to Best Buy’s in person experience but it is important to mention.

Conclusion

Overall, Best Buy should benefit from the release of Metaverse-related products, supplementing top-line growth for the coming years. I anticipate this growth flowing to the bottom-line as the company has managed its margins very well historically and will continue to do so. Shares have pulled back ~27% from all-time highs, and I think it is time to get bullish and accumulate shares. My DCF-model shows ~14% upside for the stock, a solid return as investors traverse a volatile market period.

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