UBS's Retail Analyst Knows Why Best Buy's Stock Is Getting Crushed

By many measures, Best Buy Co Inc (NYSE:BBY) reported Tuesday an encouraging earnings report, yet the stock lost more than 11 percent by Tuesday afternoon. The move has many investors scratching their heads and wondering what went wrong.

There are three reasons that may explain why investors aren't happy, UBS's hardline retail analyst Michael Lasser explained during CNBC's "Squawk on the Street" segment. First, Best Buy's stock has been a strong performer, up more than 40 percent over the past year and nearly 30 percent since the start of 2017 and is now trading at a "good and fair" multiple (see Lasser's track record here).

Second, expectations for the electronics retailer has moved up notably in the days heading into the earnings report.

Third, and most importantly, the tone during Best Buy's post-earnings conference call was that the company is transitioning away from "outsized gains in its operating margin rate" and will now see slower growth moving forward.

On the other hand, Best Buy did report its best quarterly comps since 2009 and is no longer relying on cost cutting initiatives to support its business while simultaneously seeing strong growth in many categories.

None of this has gone unnoticed by the Street and is reflected in the stock's valuation, the analyst explained. Specifically, shares of Best Buy are now trading at a mid-teens multiple while the EBITDA valuation has gone from a trough of four times to now seven times.

"Our argument is from here it really needs to drive earnings growth in order for the stock to appreciate significantly," the analyst concluded. "And while we think that the company will drive earnings growth, they are playing with a lot of external variables that are not within its control."

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