Best Buy's Stock Has Soared a Bit Too High -- Here's Why

Electronics retailer Best Buy (BBY) seems to have overcome the Amazon.com wave. Best Buy shares have gained about 54% this year.

The company seems to have located a strategy for not only survival, but also a bold recovery. Shares are at their highest levels in years. 

The company's third-quarter results were healthy. U.S. same-store sales increased 1.8%, topping analysts' expectations.

Growth in the company's home theater, mobile phones, wearables and connected home divisions helped offset a fall in gaming.

Best Buy's biggest leads were in its e-commerce segment where online sales were up 25% in the U.S. during the quarter.

The company also provided above-consensus guidance for fourth-quarter earnings per share.

Shares obviously witnessed a solid rally, even as expectations picked up.

After the spike, the stock is now trading at a price-to-earnings ratio of 14, based on estimated earnings for the fiscal year that ends in January 2018.

That doesn't seem exorbitant if you look at Amazon, which has a forward P/E of 87, and Walmart, which has a forward P/E of 16, but historically the stock appears to be fully valued.

Data from Morningstar show that Best Buy's current valuation is higher than its five-year average.

The 19 analysts offering 12-month price forecasts for Best Buy have a median price target of $38. That's $8.83 less than the current stock price of $46.83. 

A major positive this year has been Best Buy's online growth. As it did in 2015, Best Buy has offered customers free shipping on all online orders during holidays (no minimum buying required).

With a sturdy comparable-sales advance, robust online-sales growth, and rising profits, Best Buy has finally put to rest concerns about its ability to withstand the e-commerce blitz.

However, the current stock price fully values the company given its fundamentals. It would be prudent for investors to study three to four quarters of continued growth, evaluate all the parameters and then consider their investment options.

Best Buy may have contained the bleeding for now, but stores could turn into a liability the moment sales witness a decline or store traffic goes down.

The company competes in a highly cyclical and competitive market and the unstoppable growth of mobile internet usage will continue to affect the nature of the market and its movements. Prices will remain volatile, as will margins.

Investors should buy Best Buy shares, but only on dips.

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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned..

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