Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Insanity

Best Buy is at the Mercy of Fortnite

Best Buy is at the mercy of Fortnite. Thus, the electronics outlet’s dependence on the blockbuster multi-player game shows how digital media is disrupting brick and mortar retail.

In detail, Best Buy’s revenues grew by $5.211 billion between November 2018 and February 2019. Strangely, Best Buy (NYSE: BBY) Chief Financial Officer (CFO) Corie Barry believes Fortnite is responsible for the sales growth, Bloomberg reports.

To explain, Barry thinks Fortnite’s popularity drove large numbers of young boys and teens to request new video game consoles for Christmas. Consequently, obliging parents bought the consoles at Best Buy.

For those of you without kids at home, Epic Games’ Fortniteis a popular multi-player shooter most young males; and many younger females, cannot live without out. Incredibly, Fortnite has nearly 250 million players worldwide, Business Insider reports.

Is Fortnite Driving Best Buy’s sales?

However, the theory Fortnite is driving Best Buy’s sales is questionable. Notably, the revenue boost from Best Buy’s 2017 to 2018 Christmas season was larger than that of 2018 to 2019.

Specifically, Best Buy’s sales revenues grew by $6.133 billion between 4th Quarter 2017 and 1st Quarter 2018. In detail, Best Buy reported revenues of $9.32 billion in October 2017 and $15.363 billion in February 2018.

In contrast, Best Buy reports revenues of $9.59 billion for 4th Quarter 2018 and $14.801 billion for 1st Quarter 2019. Thus, Best Buy’s Christmas season revenues are lower than last year.

However, Barry thinks Best Buy’s revenue drop would have been greater without Fortnite. Unfortunately, determining Fortnite’s actual effect on Best Buy’s revenues difficult.

For instance, there are probably many people who would have bought new video game consoles with or without Fortnite. Thus, Fortnite is receiving credit for changes in the overall culture. Notably, a lot of gaming industry observers think, Electronic Arts (NASDAQ: EA) Apex Legends could be bigger than Fortnite.

How Digital Impacts Brick and Mortar

Fortnite’s effect on Best Buy (NYSE: BBY) shows how dependent brick and mortar businesses are becoming on digital media. In particular, popular digital entertainments like videos and video games are impacting retail sales.

Hence, Fortnite’s success explains why Amazon (NASDAQ: AMZN) and Apple (NASDAQ: AAPL) are developing their own digital content. Amazon and Apple management understand one popular program or game can drive sales.

For example, Apple is spending $1 billion to develop TV shows, The New York Times reports. Notably, Apple is hiring many A list Hollywood talents including Steven Spielberg, J.J. Abrams, and M. Night Shyamalan to develop programming. Plus Apple is buying movies at the Sundance and Toronto International Film festivals.

How Apple Could Threaten Best Buy with Games

CEO Tim Cook’s obvious hope is that Apple can duplicate some of Fortnite’s success and drive tens of thousands of people to buy new Apple devices with must watch programming. Moreover, bankrolling a TV show is undoubtedly cheaper than developing a new iPhone.

Obviously, developing its own games; particularly multi-player games, is a smart move for Apple. Under these circumstances we can expect tech giants like Apple to buy gaming companies or hire big-time game designers. The hope will be to create something like Fortnite to drive iPhone sales.

Apple is already making a lot of games. For instance, CultofMac estimates the 2018 revenues from iOS games at $33.2 billion. Thus Apple is already a major player in games which threatens Best Buy.

Does Best Buy Make Money?

On the other hand, Best Buy could make more money because of Fortnite and its many imitators. To explain Best Buy reports a gross profit of $3.283 billion for 1st Quarter 2019 up from $2.2324 billion in 4th Quarter 2018.

However, Best Buy’s 1St Quarter 2019 gross profit is still lower than the $3.421 billion it reported in February 2018. Thus, Fortnite is not protecting Best Buy from Amazon.

In addition, Best Buy reports a net income of $735 million and an operating income of $978 million for 1st Quarter 2019. Those numbers were better than $364 million and $872 million in 1st Quarter 2019. Hence, Best Buy is making more money but its profits are lower.

More importantly, Best Buy’s cash flow is growing. Specifically Best Buy’s free cash flow grew from $739 million in 1st Quarter 2018 to $1.101 billion in 1st Quarter 2019. In addition, Best Buy’s operating cash flow grew from $938 million to $1.301 million in the same period. Hence, Fortnite is helping Best Buy rake in more cash.  

Conversely, Best Buy has a hard time keeping that cash. Best Buy had $1.98 billion in cash and equivalents on February 3, 2019. That number was a big improvement from $1.101 billion in February 2018.

Is Best Buy a Good Dividend Stock?

Fortnite could be good for investors because Best Buy pays a dividend. In fact, that dividend will grow from 45₵ on December 31, 2018, to 50₵ on April 10, 2019.

However, Best Buy’s dividend has been growing for seven years since before Fortnite was around, reports. In addition, Best Buy investors were enjoying a dividend yield of 2.68%, an annualized payout of $2, and a payout ratio of 39.1% on 9 April 2019.

Thus, Best Buy is a good stock but I think Mr. Market overpriced it at $74.75 a share on April 9, 2019. I think investors should stay away from Best Buy right now because this company is just too vulnerable to Amazon.

In the final analysis, all investors need to look at Fortnite’s effect on Best Buy. Digital media’s growing popularity is affecting how brick and mortar businesses, particularly retailers and Big Tech operate. Those who understand this phenomenon could make money from it.