Buy this retailer's stock as an AI play, analyst says

By Tomi Kilgore

Best Buy could see an acceleration in PC sales in the coming months with launches of AI-driven products

The artificial-intelligence boom can benefit more than just companies that make semiconductors and personal computers. D.A. Davidson's Michael Baker points to one retailer that stands to get a big AI boost in the coming months.

"Looking towards the remainder of the year, we think the improvement in PC demand for Best Buy should continue as the company recently unveiled their line up of AI-enabled products," Baker wrote to clients in a note titled, "AI enabled PC's could be a back-half catalyst."

He noted that the new product assortment, launched in the consumer-electronics retailer's stores in mid-June, included 40 separate products that are driven by Microsoft Corp.'s (MSFT) Copilot AI assistant across different brands, nearly half of which are exclusive to Best Buy Co.

The stock (BBY) rose 0.2% on Wednesday. It has now run up just under 15% since Best Buy reported fiscal first-quarter results in late May, which Baker said makes it the best performer over the same time frame among the 14 retail names he follows.

Best Buy said in May that same-store sales would improve during the second quarter to a decline of 3%. And given that the company reiterated its full-year outlook for a decline of 3% to flat, the company looks set to snap its quarterly streak of same-store sales declines - the second quarter would mark the 11th straight quarter of declines - either in the third or fourth quarter.

Baker said the reason for this improvement is twofold.

For one, a rebound in PC sales over the last six months is simply the nature of PC product cycles, which typically last about four years. And after many consumers bought new PCs and laptops during the early days of the COVID-19 pandemic, he said, those products are now at "replacement age."

Helping drive that replacement demand is the need for new AI-enabled hardware. For example, Apple Inc. (AAPL) unveiled in early June its AI platform Apple Intelligence, but many users may have to upgrade their iPhones, iPads and iMacs to have access to that platform.

Revenue from computing and mobile phones represented 44% of Best Buy's total revenue in the first quarter. Add in other consumer electronics, and revenue from those two segments made up 72.6% of total revenue.

Baker reiterated his buy rating on Best Buy's stock and kept his price target at $95, which implies about 15% upside.

While the stock's gain year to date has underperformed the S&P 500 index SPX by a margin of 5.2% to 16.1%, the stock's 14.5% surge since first-quarter results were reported has beat the S&P 500's 5.1% advance over the same time.

Baker said the stock's recent recovery, resulting from improving demand, is "a trend we think should accelerate with the launch of a new AI-driven product lineup at Best Buy."

-Tomi Kilgore

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07-03-24 1444ET

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