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Best Buy's Newest Move Should Terrify Technology Investors

By Jamal Carnette, CFA – Updated Apr 18, 2018 at 2:37PM

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Best Buy is looking past the device that tech built its last decade upon.

After being left for dead, Best Buy (BBY 0.21%) is one of the biggest turnaround stories in retail. Under CEO Hubert Joly, the electronics-focused retailer has finally adjusted to the e-commerce future that nearly bankrupted the company -- ironically, a future it had a large hand in shaping. In the last three years, shares of Best Buy have approximately doubled, versus the greater S&P 500's return of 28%

Joly had to make tough decisions to turn the brand around. The newest move to cut costs is to close 250 stores by May 31. For technology-focused investors, Joly's move should be a warning sign: If his vision is correct, it's likely that big tech -- notably Apple and Samsung -- may struggle to replicate the success the industry has produced over the last decade.

Group of Millennials browsing smartphones.

Image Source: Getty Images

Joly sees a dim future for mobile

Joly is shutting down every Best Buy Mobile store, a smaller-footprint concept often found inside malls. As the name suggests, these stores were mobile-and-smartphone focused. Joly's decision is an admission that he thinks the smartphone-driven boom has passed its peak and is on the downtrend. Per Joly:

We had opened them about 12 years ago, at a time when the penetration of smartphones was very low, so this was a great growth opportunity. The margins in smartphones were very good... Fast forward to 2018, smartphone penetration is a very mature industry.

To be clear, Joly is not abandoning the mobile business. The company will continue to operate big-box stores, many of which utilize the store-within-a-store format with Apple and Samsung smartphone kiosks present. However, per Joly's statement, it's clear the CEO is envisioning a lower-growth smartphone industry, one that has essentially become a refresh-only model in the United States.

What's the next big thing?

For technology investors, once the smartphone boom ends it's hard to see a broad movement in the offing to replace it. Initially it was thought that smartwatches and other connected devices like wearable clothing and smart glasses would fill the role. Soon thereafter, many were looking to virtual and augmented reality as the next big thing, with Facebook's Oculus predicted to lead the way. Most recently, connected/smart speakers are filling that void.

While it's still early to write the obituary on the first two technologies, it appears neither will change the landscape like smartphones; smartwatches are mostly derivative, with limited functionality compared to smartphones, while the latter has failed to catch on in a meaningful way thus far.

Perhaps the next big thing is the connected home, and the Internet of Things in general. If so, the connected speaker may be a starting iteration of a larger, more-comprehensive solution, but so far the technology has been more limited in scope.

Diversification is key

It's notable that the aforementioned companies have started to diversify from smartphone hardware. Although Alphabet is moving toward full software and hardware integration with its Pixel phone, hardware was never a large part of the company's revenue haul, and more of a means to an end, which was to increase the number of searches and ad revenue from its search engine.

Samsung and Apple are more at risk, but both have taken steps to wean themselves off of device sales. Samsung is considered an electronics conglomerate, and will benefit from device sales across the computer spectrum with its memory chips and other semi-finished components, even those not bearing the Samsung brand. The company is currently riding connected speaker growth to record results.

At first glance Apple has the most at risk, as the iPhone comprises the bulk of company sales; but the company is quickly building out high-margin subscription-based revenue from Apple Music, Apple Pay, and Apple Care. In 2016 this division became Apple's second-largest, and followed that up by increasing 23%, significantly higher than the overall growth of 6%. Investors should continue to watch this segment closely.

Jamal Carnette, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Apple and Facebook. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.

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