Is There a Better Buy for Your Money Now?

Tyler is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Many businesses fail because another firm creates a competitive advantage in a major area. Best Buy (NYSE: BBY) is doing everything in its power to stay afloat. However, Best Buy has to change something in order to stay competitive with other retailers selling the same products. There are several things wrong and only a few solutions, so what will they do? There has been a lot of talk about Best Buy going private - and Thursday's news started a process that might confirm the rumors.

Early Thursday morning Best Buy announced that founder Richard Shulze would make a fully-funded bid on the company between five and six billion dollars. There was speculation that this could occur by last Friday. When share holders heard this news, they were ecstatic as the stock surged 17% throughout the day on Thursday. With the contract not being signed on Friday, the stock then fell 12%. Richard Shulze was granted an extension until Feb. 28 to place his bid. The length of the extension probably didn't help the stock from plummeting so dramatically on Friday. Best Buy has stiff competition right now by several major companies and needs to find something to do about it.  

Amazon (NASDAQ: AMZN) has taken a lot of Best Buy's business and continues to do so for many reasons. Best Buy can't compete with Amazon on price, selection, or convenience. In order to succeed, it will be forced to make a drastic move. One of Best Buys best options right now is to go private. After this, they must find something they can offer that you can't get anywhere else. This would likely come in the form of services. A perfect example of something like this is Geek Squad. It's a service where they can stand out. 

The good news for Best Buy is that they aren't the only ones suffering. Some people speculate that RadioShack (NYSE: RSH) might actually be in a worse position. Best Buy hasn't been affected as much as RadioShack because of a potential buy out. 

The graphs below show how these companies are doing in comparison to each other. It is pretty obvious that Amazon holds all the cards right now, and unless there are some major changes they will continue to do so. Short term and long term, Amazon seems to be in complete control, and performing very well for their shareholders. 

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BBY data by YCharts

So, in the past six months, Amazon is up more than 16% while Best Buy and Radio Shack have fallen 40% and 47%, respectively. How do they compare long term? Best Buy and Radio Shack have been in business longer than Amazon, but Amazon clearly holds a long term competitive advantage. 

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AMZN data by YCharts

It's not looking so bright for companies trying to compete with Amazon, as their scale, breadth, and penetration have proven too much to contend with for many big box and small specialty retailers alike. 

The Bottom Line...

It is rumored that if the deal goes through, Best Buy founder Richard Shulze will buy the stock for around $25/share, nearly double where trading ended on Thursday. Personally, I don't make investment decisions based on rumors, and would simply stay away from Best Buy completely. There are other companies that offer better risk/reward scenarios, such as Amazon. I'm happy to "warm the bench" as this game plays out. They say patience is a virtue, and in this situation, I will be virtuous in seeing what Best Buy decides to do. 

tlwofford has no positions in the stocks mentioned above. The Motley Fool owns shares of and RadioShack and is short RadioShack. Motley Fool newsletter services recommend Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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