Why Best Buy Has 35% Upside

In a report published Friday, Oppenheimer analyst Brian Nagel maintained an Outperform rating and price target of $43 on Best Buy Co Inc BBY. The analyst believes that the company's performance over the next few quarters could prove to be positive catalysts, while expecting 35 percent upside to the stock valuation.

The stock has seen a decline of 26 percent since mid-March, significantly underperforming the S&P 500 and Oppenheimer's Hardlines coverage universe. The stock is now trading at its lowest since last October. The analyst believes that investors are concerned about a challenging holiday season for Best Buy.

"We have closely reviewed our investment thesis and conclude that, while sales and expense headwinds could limit comp and EPS upside, underlying fundamental improvements at BBY continue to take shape," Nagel stated.

Although challenging comps could be a near-term headwind for Best Buy, the analyst believes that the market is already discounting for this difficult comps.

The analyst also expects the company to continue to capture share of the CE market, "even as the CE space continues to languish."

"A lack of newness in CE and weakness in tablet sales have weighed meaningfully on BBY's top line in recent quarters. We expect more positive trends in 4K TVs and other up-and-coming sectors such as Virtual Reality and Wearables/Fitness Trackers to drive continued traffic at the chain," Nagel added.

The EPS estimates for Q2 and FY15 have been lowered, while the FY16 and FY17 estimates have been raised.