Bear Of The Day: Wayfair (W)
E-commerce platforms have exploded since the pandemic locked the world down and sent consumers online. Wayfair W, a leading digital platform for purchasing furniture and home décor, has been one such beneficiary of COVID-19 with an over 1,600% share price surge from its pandemic lows last March to its all-time high in mid-January. However, W has traded sideways since last summer as investors realize the one-off nature of the pandemic's DIY boom.
After the disappointing e-commerce results from Amazon's AMZN wage pressured quarterly report last week, I feel that it would only makes sense that Wayfair's smaller operation would follow suit, especially when considering its Q2 results exhibited negative growth. I think it's time to pull profits off this COVID winner, as society's online-driven home improvement binge decelerates, ahead of its Q3 earnings report Thursday morning (10/4).
Analysts have lowered their EPS estimates for the next couple of years, reining in their initial overzealous projections, pushing W into a Zacks Rank #4 (Sell). Let me be clear here, I am not suggesting that you short sell this stock, but if you are a current stockholder, it may be a smart move to take profits here and move on to something with higher return potential.
The Business & My Concerns
Wayfair and its home goods-focused digital platform have been gaining traction for years, with revenue expanding at a compounded annual growth rate (CAGR) of 44% (with the exception of Q2's revenue miss). Still, prior to 2020, the company was experiencing continuously deeper bottom-line deficits the larger its sales grew (for 5 years), pointing to some systemic issues with the business's ability to scale.
2020 was Wayfair's golden year, and you can see this in both its financials and stock price. Its net income flipped from a deficit of $(982) million in 2019 to a robust profit of $242 million. My concern is that this profitability isn't sustainable in the post-pandemic world.
During the lockdown, people were spending way too much time in their homes, which catalyzed this desire to redecorate and engage in do-it-yourself (DIY) home projects. There has been a boom in spending on furniture and home goods, and Wayfair's ecommerce platform was perfectly positioned to capture this demand from quarantined customers.
The thing about furniture and housing décor is that many people want to see it in person before dropping a sizable amount of money on a new couch, patio furniture, etc. The argument can be made that customers have become conditioned to purchase things off Wayfair instead of going to their local furniture store. However, the fact of the matter is that even if this is true, people will still not be spending as much money on these items when the economy opens up. Consumers will be pivoting their budgets away from decorative pillows and towards things like travel and restaurants.
I am worried that this company will not be able to maintain its profitability in the post-pandemic world, and even if they do, it will not see the same growth rates that it saw amid the lockdowns.
Final Thoughts
W currently has 3 sell ratings on it, which is a red flag because sell ratings are not handed out nearly as often as buy/hold ratings (considering that the stock market, on average, always goes up). Wayfair is also sporting an over 200% debt-to-total capital ratio as it leverages its operations to the gills, pushing shareholders' equity deep into negative territory, another big red flag. If the company is unable to maintain profitable growth, it may be in real trouble. Again, I am not recommending that you short this stock. Just consider reallocating the capital to a more topical investment such as Riot Blockchain RIOT, my Bull Of The Day.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Amazon.com, Inc. (AMZN) : Free Stock Analysis Report
Wayfair Inc. (W) : Free Stock Analysis Report
Riot Blockchain, Inc. (RIOT) : Free Stock Analysis Report
To read this article on Zacks.com click here.
