Analysts Share Diverging Views on Best Buy, Poised To Benefit From Demand For AI-powered Hardware

Shares of the US consumer electronics retailer Best Buy have showcased upward momentum, returning 8.54% in the last five days, despite the company recently posting a drop in quarterly sales.

Best Buy's sales revenue for the quarter ended May 4 declined by 6.1% to $8.84 billion from $9.46 billion. However, the company managed to preserve its profitability as GAAP net income grew 3.5% on a growing membership base and reduced admin costs.

Best Buy CEO Corie Barry said in the earnings release, "We made progress on our FY25 priorities, grew our paid membership base and drove improvements in our customer experiences."

He attributed the challenging sales landscape to the prolonged unfavourable macro factors. Still, he remained committed to driving computing and home theatre sales via competitive pricing and new-age customer engagement.

At the same time, cooling inflation, slowing payroll growth, and signs of strength in consumer confidence may also help stabilise the electronics industry. The stock received another boost after Citi analyst Steven Zaccone double-upgraded the retailer to "Buy" from "Sell," citing a potential demand surge for electronics with AI capabilities.

Zaccone lifted his share price target to $100, implying an upside of over 11% from current trading levels of $88.16.

"We believe the catalyst path looks positive from here with upside potential to both earnings and valuation based on tech-replacement cycles underway, new AI innovation providing incremental demand, and margin execution remaining solid," the analyst wrote.

Rising demand for hardware with built-in generative AI features is prompting tech giants like Microsoft to build hardware like computers capable of running AI-powered software.

Furthermore, speculations are peaking that Apple could announce an AI-powered iPhone at the Worldwide Developers Conference that begins on June 10.

"We view the upcoming AI-enabled phones (IntelliPhones) to drive a multiyear upgrade cycle similar to the step function improvement driven by the introduction of smartphones," Bank of America (BofA) Securities analyst Wamsi Mohan recently noted. "With an installed base of over 4 billion smartphones, we see the opportunity for the next upgrade cycle to be a once-in-a-decade type of event."

Meanwhile, Barry had said in the earnings call that "those [AI products] tend to start at a higher price point; there's definitely a consumer who fundamentally believes that the value propositions of these devices will make them more productive."

Citi also acknowledged that consumer uncertainty arising from election distraction and shortened holiday calendar poses risks to Best Buy's same-store sales (SSS) in the latter half of the year but believes Best Buy is "in the late innings of SSS declines and is approaching the positive inflection point."

"We see a favourable combination of replacement cycle and innovation occurring in the next few years, which should drive increased transactions and the potential for higher ASPs [average selling prices] to lift SSS [same-store sales]," Zaccone wrote.

However, Bank of America analyst Robert Ohmes was bearish on the appliance sector. He maintained an "Underperform" rating on Best Buy and forecast "continued weakness in the appliance category given YoY declines in pricing and higher retail promotions as well as potential market share pressures from competitor Costco."

While the company expects comparable sales to fall by almost 3% in the next quarter, it announced a quarterly cash dividend of $0.94 per common share to return $202 million to shareholders. Basic earnings per share also increased YoY to $1.14 from $1.11.

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