Investments
Investments entail different risks driven by various factors. The chance that the return on one’s investments will vary from the expected return depends on the present value and the risk/return tradeoff, which enables one to make correct investment decisions by picking the right investment options depending on the amount of risk involved. The present value is an investment’s expected income, while the risk/return tradeoff refers to the capacity to accept the uncertainty associated with the potential returns of an investment. The following paper will determine the investment risk for Best Buy Company by reviewing its beta, stock price movements, and comparing it with its market competitors.
Best Buy Co. Inc. is an American-based multinational firm that provides consumer technology products, services, and solutions. The company operates via the domestic segment in the United States and the international segment, for countries such as Canada, Mexico, and China. It is associated with different brands depending on the target segment; for instance, the domestic market brands include Best Buy Mobile, Geek squad, Napster, Magnolia Home Theater, and Pacific Sales. Likewise, the international segment offers products through online retail sites such as bestbuy.com.ca, bestbuy.com.mx, and Best Buy Express (Reuters, n.d.). Best Buy Company is interesting because it has had a mismatch between its revenues and stock price over the last three years. The organization’s stock gained over 93% between 2017 and 2020, but its revenues only increased by 11% by the end of the quarter ending January 2020 (Trefis Team). This growth can be attributed to earnings growth and strategy. During the period 2017-2020, the company’s earnings margins grew from 3.1% to 3.5%, and the P/E multiple expanded from 12.2x to 14.4x due to cost management improvement. Nonetheless, expenses decreased from 19.2% to 18.3% of revenue, and the net income margin dropped to 2.4% from 3.1% in 2018 (Trefis Team). Moreover, the company executed two multiyear strategic plans: Renew Blue and Best Buy 2020. As a result, it closed a majority of its stores and cut its internal operational costs to enhance its market position and competitive edge against other retail giants. Best Buy also remodeled its stores, grew its e-commerce, optimized its square footage, and stabilized its income stream. These actions enabled Best Buy to resume positive fiscal growth, registering a 7% year-over-year growth rate in 2018-2020 (Trefis Team).
An organization’s stock beta indicates the tradeoff between maximizing return and minimizing the risk of investment. Best Buy’s beta is 1.47, which implies that the company’s stock has 147% of the volatility of the S&P index (Yahoo Finance, 2020). It also means that the security swings more than the market over time and can be riskier, but provides high return potential. The only downside with the Best Buy’s beta of 1.47 is that it does not reveal information about the stock price paid relative to fundamental factors such as leadership, future cash flows, or new product discoveries. Nonetheless, the company can be considered to be a high-risk investment with potentially high returns.
An analysis of Best Buy’s stock price movements in the past year shows that the company’s highest stock price value was $91.99 in February 2020, and the lowest stock price value was $48.105 in March 2020, representing a 48% decline. The five-year pattern shows that the highest stock price value for Best Buy was $27.11 in 2017 and $91.99 in 2020, indicating a 239 % upturn (Yahoo Finance, 2020). One of the main reasons for the significant changes in stock price value in the last 52 weeks is the COVID-19 Pandemic, which caused a global economic downturn and significant declines in the stock market between February and March 2020. The pandemic outbreak had adverse effects on Best Buy’s inventory, which heavily relied on China for its production. Factory shutdowns in China and across the world due to the great lockdown imposed by the pandemic caused significant delays in shipments and forced Best Buy to close a majority of its stores (Rivas, 2020). The five-year analysis shows that the company’s stock steadily increased from lows of $27.11 in 2017 to highs of $91.99 in 2020. The reasons for this significant growth are cost management and the Renew Blue and Best Buy 2020 strategic plans, which allowed the business to cut costs and revise its strategy in the retail market. Comparing Best Buy’s stock trends in the last few months with its trajectory in the previous five years indicates that the company’s stock price will recover significantly and potentially outperform the S&P index. The company’s stock has seen a major gain in value, with analysts expecting it to close firmly at $84 by the end of 2020 (CNN Business, 2020). Therefore, Best Buy’s stock is currently a high-risk investment but might stabilize after the Coronavirus Pandemic, making it a lucrative investment with potentially high returns.
Some of the top global retail companies are Walmart and Amazon Inc. An analysis of Amazon stock shows that it has a beta of 1.32 and has gained from $432.71 in 2015 to $2754.58 in 2020, representing a 537% increase over the last five years (Yahoo Finance, 2020). On the other hand, Walmart has a beta of 0.32 and has gained from $56.42 in 2015 to 132.12 in 2020, representing a 134% increase over the last five years (Yahoo Finance, 2020). Pitting these two companies against Best Buy reveals that Amazon is a better bet, while Walmart is a worse bet. The reason is that Amazon has shown significant improvements in stock price gains over the last five years, and its beta value indicates a high-return potential in the future. Conversely, Walmart’s beta value is below 1.0, even though its stock price gain over the last five years is positive. The low stock beta value shows that the company’s stock has lower volatility than the market standard, meaning that it is less risky but also yields lower returns.
Best Buy Company is one of the top global retail companies showing great potential in its market segment. Its beta of 1.47 indicates high-risk high-return investment prospects, backed by its 239% upturn in stock value over the last five years. These statistics suggest that Best Buy’s stock is of significant importance, and investors should think about buying and holding them in the long run. Additionally, the company competes with organizations such as Amazon and Walmart in the retail segment. While both companies have gained significantly over the last five years, Amazon is a better buy since it has a beta value of 1.32, which is higher than Walmart’s 0.32. The high beta value and comparatively higher gains of 537% in the last five years also indicate that Amazon stock performed better than Best Buy’s, making it the best bet for investors.