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Better Buy: Amazon vs. Best Buy

By Nicholas Rossolillo – Sep 13, 2020 at 12:25PM

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Amazon is undoubtedly the growth story, but don't underestimate Best Buy stock's value.

2020 has been a landmark year for e-commerce. With shelter-in-place and social distancing orders going into effect, online shopping became a necessity for many households. And many brick-and-mortar retailers were left with few other options than to sell merchandise via the internet too. 

Many of them, like Best Buy (BBY -2.29%), have done quite well. In fact, Best Buy's latest quarterly report shows it is bucking the 19% sales decline so far this year for electronics and appliance stores reported by the U.S. Census Bureau through the end of July. Meanwhile, e-commerce stores like Amazon (AMZN 0.24%) have been off to the races.

Without a doubt, Amazon and its cloud computing AWS segment is the growth story of this generation. But don't ignore the value and dividend Best Buy stock offers right now.  

A mini shopping cart full of boxes sitting on top of a computer.

Image source: Getty Images.

Amazon: Same story, crisis or not

Amazon's second-quarter 2020 results -- the period during the height of the lockdown to halt the spread of COVID-19 -- would have been impressive numbers for any company. But considering that this is a business currently valued at $1.59 trillion makes the report card that much more astounding. 

Total sales were $88.9 billion, up 40% year over year (an acceleration from the 26% growth rate in the first quarter of 2020). Operating income surged 89% to $5.84 billion. The cloud computing segment AWS led the way on the profit front once again, accounting for 57% of operating income even though revenue from the segment was only 12% of the grand total.

Over the last trailing twelve months ended July 2020, Amazon has generated $31.9 billion in free cash flow (revenue less cash operating and capital expenses, basically what gets added to or subtracted from the balance sheet each quarter). That's a 27% increase over the same metric a year ago, albeit a rate lower than overall sales growth as Amazon continues to find places to invest cash and disrupt the status quo. And at 50 times trailing 12-month free cash flow, this is no cheap stock.

But given the enduring growth story here and massive potential that still exists, it isn't a totally unreasonable premium. Add in a balance sheet with $71.4 billion in cash and short-term investments and only $23.4 billion in debt, and it's not hard to imagine Amazon continuing its torrid pace of expansion for a long time to come.  

Some of the recent momentum building at Amazon may be due to the pandemic and ensuing lockdown. Don't expect the most recent 40% pace to last forever. Nevertheless, if you're looking for a solid growth stock, look no further. On the other hand, while Best Buy is no growth story like Amazon, the electronics retailer still has value many investors may be overlooking.

Is Best Buy too cheap to ignore?

Best Buy stock has been no slouch this year. While it trails the massive 72% gain for Amazon 2020 to-date, up 24% so far this year isn't so shabby, especially when the S&P 500 is up only 4%. But even after its run and reporting its Q2 results, Best Buy currently trades for a meager 5.7 times trailing 12-month free cash flow (or trailing 12-month price-to-earnings of 17.5, although that figure includes non-cash expenses like depreciation).  

Whatever metric you want to use, Best Buy looks like a value. Though many consumer electronics segments have been struggling this year (like the smartphone market), this brick-and-mortar merchandiser has been doing just fine overall. Its online sales surged 242% during the second quarter as many of its stores were closed to foot traffic, helping the company manage a 4% and 82% increase in revenue and net income, respectively. Regarding the booming bottom line, much of the increase was due to lower operating expense, as the company was able to use its stores to fulfill online orders via local shipping or curbside pickup.  

It's an unsustainable rate of increase over the long term, and management acknowledged as much, as it said operating expenses should return to where they were pre-pandemic headed into the final months of 2020. But it would be incorrect to simply dismiss what's going on here as a one-off benefit.

Much like other traditional retailers like Target (TGT -0.83%) have done with their efforts to update their businesses for the 21st century, Best Buy is making the transition to digital sales and is finding new uses for its stores as a sort of localized distribution center network. Simply put, sales growth is sluggish -- especially when comparing it to Amazon's -- but Best Buy's profits aren't as it unlocks new efficiencies for its real estate in the digital age. Shares look like a more than fair price, considering the bottom-line potential here.  

Adding to the thesis for Best Buy is a rock-solid balance sheet that boasts a net cash position, a rarity in the traditional retailer world. At the end of July, Best Buy had $5.31 billion in cash and equivalents and only $1.31 billion in debt. Even in a world where COVID-19 doesn't exist, this is an enviable position to be in and puts this 2.1% yielding dividend stock on solid footing.

So which is the better buy? Amazon is without a doubt the growth story here, although I'd argue as in times past that the most compelling reason to have a stake in Amazon is for the highly profitable AWS cloud segment. Thus, for investors looking for a good retail stock, don't ignore Best Buy. It trades for a reasonable price, is growing at a modest but respectable rate, and is in superb financial condition.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Nicholas Rossolillo owns shares of Target. His clients may own shares of the companies mentioned. The Motley Fool owns shares of and recommends Amazon and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. The Motley Fool has a disclosure policy.

Stocks Mentioned Stock Quote
$88.46 (0.24%) $0.21
Best Buy Stock Quote
Best Buy
$81.37 (-2.29%) $-1.91
Target Stock Quote
$153.76 (-0.83%) $-1.29

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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