Best Buy: the structural short
Recommendation: Short Best Buy (NYSE: BBY) Current Price: $75 | 12m Price Target: $61 | IRR: ~20%
We view Best Buy as a compelling short. Near-term earnings face downside risk on top of a business model in structural decline: an attractive setup for a company with moderate short interest of ~8%.
The recent 2Q26 earnings beat has triggered a sentiment rebound, with investors extrapolating a one-off gaming release as a genuine inflection. Our analysis suggests this is misplaced.
Three pillars of the thesis:
1. Comps are not inflecting. We estimate the Nintendo Switch 2 launch contributed ~2% to 2Q26 comp growth, implying underlying comps were flat to negative. Foot traffic data, web traffic, and credit card spending all point to continued weakness. The market's expectation of 2-3%+ comp recovery is unlikely to materialise.
2. Margins are structurally impaired. Best Buy's competitive differentiation — in-store expertise and Geek Squad has been gutted through cost-cutting. Vendors now charge Best Buy at least 10% higher prices than Walmart. High-margin profit pools (warranties, credit cards) have collapsed to less than half their FY2017 levels. Discount intensity is at its highest since 1Q20, yet comps remain negative.
3. The strategic pivot accelerates the decline. Rather than reinforcing its position as a premium electronics retailer, Best Buy is shifting to marketplace and advertising, directly competing with Amazon and Walmart on price and scale, a battle it cannot win.
Our model forecasts gross margins falling toward 21% and operating margins below 4%, well below the consensus expectation of stabilisation at 22.5% gross and 4.2% operating.
