“Circuit City Stores Inc. has filed for Chapter 11 bankruptcy protection and plans to liquidate all of its 567 U.S. stores … . Shares of Best Buy rose on the news 3 percent.”
The above quote is from a Reuters articles from March 2009.
Circuit City once was the second-largest electronics retailer in the country, the biggest was Best Buy. At the time, the increase in Best Buy’s shares seemed logical. Circuit City is gone, and Best Buy would pick up all the bankrupt company’s former customers. Furthermore, many stores were in similar locations. The competition was over, and Best Buy was now king.
That news seems to have taken place centuries ago.
The CEO of Best Buy recently offered to take the company private at a premium to the current share price. However, many analysts are doubtful that money can be found to satisfy existing shareholders.
One big shareholder who threw in the towel recently is David Einhorn, CEO of Greenlight Capital. Einhorn’s mere negative comment about a company can send the stock down double digits. Einhorn has been a long-time shareholder of Best Buy, but states now that he is not certain the company can face competition from Amazon.
Amazon started chipping away at Best Buy customers several years ago. As the recession hit and more people started using smartphones, they were more conscious about prices and able to get prices on the spot. If a customer saw a laptop selling for $450, he or she could check on their smartphone how much the phone was selling for at Amazon or other retailers.
The rest is history. Best Buy is struggling, and whether the company can survive is in doubt. There is no customer loyalty to Best Buy products. If people can find the Dell laptop for a much cheaper price, they will buy it at a different store.
What is the point of this story?
The point is not that Best Buy is a bad (or good) stock. Instead, there are two important lessons for investors:
1. Elimination of competition is great, but it does not guarantee success. If smartphone-maker HTC goes bankrupt, it could help Apple, but it would not guarantee the tech giant more profits.
2. More importantly, technology is changing so rapidly it is affecting every industry and company. Companies that could have been thriving 10 years ago, could go under due to a new technology product.
It is very important for investors to keep both points in mind, especially the later.
(Disclosure: The author has no stake in any companies mentioned)
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