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Electronics retailer Best Buy (NYSE: BBY ) , left for dead just last year, has rebounded with a vengeance, and shares are now up more than 220% in 2013. But even after such an impressive rally, I continue to stick with Best Buy as a key holding in my portfolio -- I think it's the single greatest play on the next big trend in consumer tech.
In the coming months, consumers will be bombarded with a variety of wearable computing devices -- watches, glasses, and athletic bands. Although they could go online to purchase these products, I think it's far more likely that they'll turn to their local Best Buy.
The Samsung deal changed everything
In recent months, South Korean tech giant Samsung (NASDAQOTH: SSNLF ) has cozied up with Best Buy, rolling out Samsung "Experience Shops" in Best Buy stores throughout the US. The deal was a big win for both companies.
Samsung, in its ongoing quest to compete with Apple, needed a retail operation of its own, but building stores across the country would take a long time -- perhaps the most valuable resource in the rapidly changing world of consumer tech. Rather than waste years, Samsung simply struck a deal with Best Buy for floor space, and in the span of just a few months, Samsung had its own competing retail operation complete with its own employees. Of course, the deal was even more beneficial to Best Buy than it was to Samsung.
It's no secret that Best Buy has excess floor space. A decade ago, those mammoth stores were necessary -- thousands of square feet were needed for all the DVDs, video games, and CDs Best Buy needed to stock. Obviously, that's no longer the case -- all of those media formats have gone, or are in the process of going, fully digital.
Giving Samsung floor space, and then letting Samsung stock with it with its own employees, is a double win for Best Buy -- smaller payrolls, less excess real estate. That win was enhanced when Microsoft, perhaps understanding the benefits to Samsung, followed, announcing Windows Stores within some 500 Best Buys across the country.
No other deals have been announced yet, but I strongly suspect that other companies, in particular Google (NASDAQ: GOOGL ) , will look to partner with Best Buy in the coming quarters. It's been rumored that Google was working on a deal with Best Buy, and it makes sense.
Google will need a storefront for its hardware
Google is rapidly becoming a major player in the world of hardware. In addition to its lineup of Nexus devices, its Chromecast, and its Chromebook Pixel, Google is poised to release perhaps the most revolutionary piece of hardware since the iPhone.
Love it or hate it, there's no denying Google Glass' radical nature. For the first time, consumers will be able to purchase a computer that mounts to their head. The device could fail -- it could be too expensive, or too unpolished. But if consumers are going to purchase one, they're going to need to see it in person.
Unlike TVs, smartphones and other electronic gadgets that are, at this point, familiar to consumers--wearables like Google Glass are not. For someone to shell out hundreds, perhaps thousands of dollars on a device like Google Glass, they're going to want to try it on, test it out, and see how it works.
The same can be said for Samsung's watch, the Galaxy Gear. Reviews have not been kind to the device, and at $299, it could be a hard sell to the average consumer. Nevertheless, if it's going to be successful, it'll be because of (at least partially) Samsung's partnership with Best Buy. With the Experience Shops, consumers can go into their local Best Buy to try the Galaxy Gear out, and get a demonstration from a Samsung-trained employee.
Google is rumored to be working on a watch of its own, as are other major tech firms like Microsoft and LG. In time, these devices will become widespread and widely understood by consumers -- but until then, Best Buy has the edge.
Best Buy has killed showrooming
Of course, that raises the last issue that's plagued Best Buy -- showrooming. Even if they try these wearables out in the store, there's nothing to stop consumers from simply pulling out their smartphone and purchasing them online.
But Best Buy has an answer for that too -- it has moved to price-match Amazon and other online retailers. Moreover, it's invested heavily in its own website, and has begun to ship products directly from its stores to consumers' homes.
Wearables could send Best Buy shares even higher
Best Buy shares have been on a tear this year, and I continue to believe they're going much higher. Best Buy was obliterated in 2012, largely based on the assumption that it had a broken business model -- one fundamentally challenged by the rise of online shopping.
But as new devices -- radical gadgets like Samsung's Galaxy Gear and Google Glass -- become available, consumers are going to want to test them out in person. That's where Best Buy, and its partnerships with manufacturers, including Samsung, Microsoft, and maybe Google, comes in.
Investors looking to play wearable computing should consider an investment in Best Buy.
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