Wayfair Continues Its Money-Losing Ways

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About: Wayfair (W)
by: Christopher Speetzen
Summary

Wayfair isn’t profitable.

The higher revenues go, the more money it loses.

A buyout is its only hope.

Wayfair (NYSE:W) is an e-commerce company that sells home goods. It was founded in Boston in 2002 and today, it is the largest online-only retailer for home furniture in the United States. It is also the 33rd largest online retailer in the US. It has had a phenomenal increase in revenues from $601 million in 2012 to $2.25 billion in 2015. This equates to 274% growth at a 55% CAGR - quite impressive over a three-year period. The problem is that as Wayfair continues its top-line growth, its losses grow. Over the last nine months, as of 9.30.16, its losses were $150 million versus a loss of $62 million in 2015 through the first nine months. If these additional sales generate additional losses for shareholders maybe it's time to pack up and close shop.

As I write this the stock is ~$30 per share, but it is extremely volatile as Wayfair just released its Q3 earnings report. Wayfair is valued at over $2 billion (over $3 billion as of yesterday) with negative margins and negative free cash flow. That sure is a hefty price tag for a company that can't seem to make any money.

11/8/2019

W

Stock Price

$ 30.00

MKT CAP (BIL)

$ 2.55

E/V

$ 2.35

P/E

-

TTM ROE

-53%

Oper Margin

-4.37%

Net Margin

-4.20%

TTM FCF (Mil)

$ (36)

Chart made using data from gurufocus.com

The below chart shows how quickly revenues have grown, but again, as revenues have grown, cost of goods sold, SG&A and advertising have grown at roughly the same or higher rates leading to larger operating and net losses. The executives at Wayfair like to tout their average ticket increase and their customer retention numbers, but for every dollar they spend obtaining new customers and trying to retain customers it appears they are losing on the bottom line.

Wayfair

2012

2013

2014

2015

CAGR

Revenues

601

916

1,319

2,250

55.3%

Cost of Goods Sold

456

692

1,008

1,709

55.3%

SG&A

166

240

458

621

55.2%

Advertising

66

108

191

278

61.5%

Oper. Income (Loss)

(65)

(108)

(190)

(277)

62.1%

Net Income (Net Loss)

(21)

(15)

(148)

(77)

54.2%

Shares

-

66

51

84

-

EBITDA

(12)

(3)

(126)

(49)

60%

Operating Margin

-3.6%

-1.8%

-11.2%

-3.6%

0.6%

Chart made using data from gurufocus.com

As you can see from the below chart, even revenue growth is beginning to slow. Wayfair's yearly growth has gone from the 80% range Y/Y to its current 45% Y/Y growth. All the while, operating expenses as a percentage of revenue have gone from an average of 28% in 2015 to 30% in 2016. With gross margins of 24% staying roughly stable, this again shows operating and net losses will continue. Wayfair has shown that it can't get enough operating leverage from growing its top line and the only way it can show any sort of bottom line growth will be by cutting advertising or employee costs. But if it cuts these costs the top line will stop growing and the growth story of Wayfair will be shuddered causing a vast repricing of the valuation as it is a growth stock.

Wayfair - Revenues

Q3 '16

Q2 '16

Q1 '16

Q4 '15

Q3'15

Q2 '15

Q1 '15

Q4 '14

Quarterly Revenues

861,525

786,928

747,348

739,790

593,972

491,752

424,371

408,619

Q/Q Change

9%

5%

1%

25%

21%

16%

4%

Y/Y Change

45%

60%

76%

81%

Wayfair - Expenses

Q3 '16

Q2 '16

Q1 '16

Q4 '15

Q3'15

Q2 '15

Q1 '15

Q4 '14

Operating Expenses

263,281

237,244

221,165

191,696

160,023

140,274

130,081

170,909

Q/Q Change

11%

7%

15%

20%

14%

8%

-24%

Y/Y Change

65%

69%

70%

12%

OPEX % of Revenue

31%

30%

30%

26%

27%

29%

31%

42%

Chart built using SEC filings from Wayfair.

So if Wayfair continues to see deceleration in the top line and can't show profits, where does it go from here? Even with the ~10% decline in the stock price today it will need to trade lower unless somebody decides to buy it out. We are currently seeing a lot of companies get bought out, but as of the last earnings report, Wayfair had $110 million in equity, which means it is trading for roughly 25x book value. Total stockholders' equity has also been decreasing at an alarmingly quick rate. It has gone from $306 million in 2014 to $243 million in 2015 to its current $110 million. The management of this company seems intent on destroying equity. We did see Wal-Mart (NYSE:WMT) buy out the famously unprofitable Jet.com for $3.3 billion in cash and stock, mainly to bolster its e-commerce abilities so that could happen with Wayfair, but in this author's opinion, I think a buyout is a long-shot. Wayfair also may need to contend with a slowing housing market and millennials who seem hesitant to spend dollars on things and would rather spend money on experiences. Unless you are speculating rather than investing I would stay as far away from Wayfair as possible. Below is a great quote from Warren Buffett, which I believe exquisitely sums up Wayfair as an investment.

"The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities-that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future-will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There's a problem, though: They are dancing in a room in which the clocks have no hands."

- Warren Buffett

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.