On Friday, Evercore ISI increased its price target for Best Buy Co. Inc. (NYSE: NYSE:BBY) shares to $90 from the previous $80, while maintaining an Outperform rating on the company's stock.
The adjustment follows Best Buy's announcement of improved May sales, showing a decrease of only 2-3%, and the launch of a new AI-led laptop cycle which resulted in a 13% surge in the company's stock price, returning it to its March level.
Best Buy reported first-quarter comparable sales (comps) that fell 6%, which did not meet expectations. However, earnings per share (EPS) outperformed forecasts due to stronger gross margins.
Analysts at Evercore ISI highlighted that despite the top-line shortfall during a typically slow season, the positive trends in May's comp sales, along with the start of an innovation cycle and a "green shoots" outlook, were significant factors that outweighed the revenue miss.
The company's gross margins have benefited from a shift in business mix towards services, although this has been partially counterbalanced by increased promotional activities, especially in the appliances and TV segments.
The firm noted that Best Buy is pivoting its strategy to address market share pressures, with vendor support continuing to play a role.
Evercore ISI suggests that Best Buy's earnings have likely reached a low point, maintaining above $6, due to improving comp trends and the onset of a significant product cycle, with computing accounting for over 40% of sales.
The analyst firm anticipates that gains in services margin, expected to provide more than 50 basis points of support in 2024, will more than compensate for the pressures of increased promotions and credit profit challenges.
The report also mentioned a potential scenario where, if Best Buy's positive trends continue into the third quarter with an innovation cycle and margin recovery, EPS could surpass $7 and push the stock value above $100. On the other hand, skepticism remains, with some viewing this outlook as overly optimistic, suggesting that continued consumer electronics deflation and pressure on small-ticket items could lead to a decline in comps, potentially reducing EPS below $6 and the stock price toward $60.
Evercore ISI remains optimistic, arguing that the situation for Best Buy is improving, with a 5% dividend yield providing support while waiting for a turnaround. The firm has adjusted its 2024 EPS forecast to $6.10, with the 2025 estimate remaining at $6.40. The revised base case price target of $90 reflects an assumption of a 30% discount to the S&P 500 as the company's sales return to a flat growth trajectory.
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