TV Replacement Cycle

Last week, I attended one of the biggest events in the tech world – the Consumer Electronics Show (CES).

CES is one of the largest consumer-electronics and technology conferences on the planet. Over 155,000 people were expected to fill the more-than two-million-square-foot venue in Las Vegas this year to check out the latest innovations and gadgets from more than 3,000 exhibitors.

I saw headbands that measure brain activity… I saw a band playing live music from instruments made by 3D printing (the printing of solid objects like toys, tools, furniture, machine parts, and even guns)… And I saw a kitchen and living room where everything – appliances, sound systems, door locks, and lights – was controlled by a mobile phone.

But one of the biggest trends this year was an innovation of a product you already use every day…
Thousands of ultra-high-definition and “4K” televisions were on display at this year’s CES. These are super-high resolution TVs where the picture is almost life-like. 4K televisions have screen resolutions four times today’s high-definition televisions.

I expect this technology to spur the next major replacement cycle in TVs.

The television replacement cycle is used by consumer-electronics industry experts to show how often consumers replace or upgrade their TVs. Today, experts estimate people replace their TVs every seven years. But this cycle is shrinking. For example, in 2012, the global cycle went from 8.4 years to 6.9 years. People are replacing and upgrading their TVs faster as new features and technology become available.

The last major upgrade cycle began in 2005 when consumers upgraded from standard-definition to high-definition televisions. The next major cycle will be the upgrade to ultra-high-definition.

Already, content-streaming services like Netflix and Amazon are working to create and stream more content in 4K.

Netflix announced this week that it will start streaming movies in 4K within six months. Amazon said it will shoot all its upcoming original television series in 4K. And YouTube was showing videos in 4K at this year’s CES. You can see one of YouTube’s 4K videos here. (Be sure to change the settings in the bottom right-hand corner to 4K.)

TV manufacturers like Sony, LG, Sharp, and Samsung will be big beneficiaries of this trend.

But one of the biggest winners will be retail giant Best Buy…

I know… Best Buy competes in a market with discount giants Amazon and Wal-Mart. Price wars for the old standard high-definition televisions almost put Best Buy out of business in 2012.

But Best Buy has a significant advantage over its competitors during the upcoming replacement cycle in televisions.

These new 4K televisions are highly sophisticated. They have Internet capabilities and color schemes that need to be adjusted professionally to account for how much light is in your room. Even electronics geeks will need help setting up these TVs. That’s where Best Buy’s significant advantage comes in…

Best Buy’s Geek Squad is one of the few electronics retailers that install televisions and show consumers how to use them.

I talked about Best Buy and the 4K trend with a Sony representative at the CES named Alex. (He was also a former manager at Best Buy.)

Alex told me Geek Squad is a cash cow already. He says each Geek Squad truck has $4,000 worth of inventory in it. Things like HDMI or optic cables, sound bars, and surge protectors. This equipment gets sold on site – during the installation process – since most people forget to buy surge protectors and extra cables.

Best Buy also already makes a fortune on warranties, which will continue. The 4K TVs will run over $3,000 and likely come with only a one-year factory warranty. Most consumers will be willing to spend around $600 for three years of coverage.

In short, Best Buy will make huge profits off its services and accessories for these 4K TVs.

During the last major upgrade cycle in 2005, Best Buy shares hit an all-time high of over $50. That’s more than 35% higher than today’s price of around $37 per share. But as more and more 4K TVs hit the shelves next year, I expect Best Buy shares to go even higher.

Per-share earnings could also shoot higher. Geek Squad is a super-high-margin business. That means Best Buy will generate higher profits on every dollar in sales. Analysts expect Best Buy to generate $2.43 per share in earnings next year. But these earnings could double within three years as more TVs are sold.

The new television replacement cycle will soon be here. There will be plenty of winners in the space… But Best Buy will be king as it becomes the hub for anyone looking to buy anything 4K.

Source: Growth Stock Wire