Amazon.com, Inc. (AMZN), Wal-Mart Stores, Inc. (WMT): Best Buy Co., Inc. (BBY) Stock Has Gone Too Far

Even Wal-Mart Stores, Inc. (NYSE:WMT) remains a significant competitive threat. Wal-Mart has lower operating costs than Best Buy due to its scale. Best Buy seems to have gained market share from Wal-Mart in TVs and some other categories last quarter, but Wal-Mart’s management is determined to fight back through even lower prices. Best Buy can continue to respond with its own price cuts and its price-matching policy, but while it may maintain its market share, profitability will suffer nonetheless.

Watch out!

Best Buy is in much better shape today than it was a year ago due to Joly’s decisive turnaround plan. The company has dramatically improved its competitiveness in the past year by cutting prices and entering partnerships with Samsung and Microsoft. In the short term, Best Buy may also benefit from the fall release of next-generation video game consoles by Sony and Microsoft.

However, Best Buy also faces a raft of short- and long-term challenges. The company’s new focus on price competitiveness has more or less stopped the cycle of declining revenue, but it has pressured its gross margin. Warranty costs and credit card revenues will also be headwinds over the next year. Longer term, brutal competition with discounters like Amazon.com, Inc. (NASDAQ:AMZN), Wal-Mart Stores, Inc. (NYSE:WMT), and Costco will make it hard to achieve significant margin expansion. As a result, Best Buy stock is probably due for a pullback.

The article Best Buy Stock Has Gone Too Far originally appeared on Fool.com and is written by Adam Levine-Weinberg.

Fool contributor Adam Levine-Weinberg owns shares of Apple and is long January 2015 $390 calls on Apple and short shares of Amazon.com. The Motley Fool recommends and owns shares of Amazon.com, Apple, and Costco Wholesale. It also owns shares of Microsoft.

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