- I question the near-term sustainability of Wayfair's 90% quarter-to-May revenue growth rates.
- Questioning its long-term financial model, and whether it is enough of a carrot for new investors.
- On balance, I charge that there's already too much optimism priced into this investment.
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Wayfair (NYSE:W) is not being valued on anything asides from a 'growth story'. Consequently, I have purposely avoided discussing its lack of sustainable GAAP profits or even focusing on its balance sheet.
I have squarely aimed my analysis at trying to ascertain what its near-term growth rates could be. And whether shareholders have a positive risk-reward balance at present.
What I find is that all the good news - and then some - are already priced into its share price.
Having said that, while the share price is going up day after day, nobody wants to ask difficult questions from their investment. But in my opinion, when Wayfair already trades for $16 billion, it is precisely the most important time to ask difficult questions.
Strong Growth Expected in Q2
Quarter-to-May (latest update) revenue is up 90% - this is the show stopper, of course.
The question for bulls and bears alike is just how close to sustainable will this level of growth be as the economy re-opens? Will a portion of Wayfair's newly found customers continue to reengage with the brand?
Source: author's calculations
Above, I depict Wayfair's sustainable growth rates.
Looking back to the period of 2017-2018, its revenue growth rate was above 40% on average. Meanwhile, for the bulk of 2019, its revenue growth rate fell for the most part below 40% (the exception being Q2 2019, which marginally peaked higher).
Accordingly, I believe it is more than reasonable to assert that Wayfair's 90% quarter-to-date revenue growth rates are an anomaly. The next question is what will the rest of 2020 look like?
Competition Re-Opens Its Doors
Realistically, nobody truly knows how the rest of 2020 is going to play out for Wayfair.
What I do know is that many of Wayfair's competitors, such as Bed Bath and Beyond (BBBY) have been left with too much inventory that they need to sell at fire sale prices - in order to avoid obsolescence.
Bed Bath, in particular, was already trying to dispose of its elevated 2019 inventory before it had to shut down its doors. When Bed Bath reopens its doors in earnest, it will be very aggressive in it shedding its inventory.
Large Cost Comes Down For Wayfair - Positive News For Shareholders
Wayfair's primary cost is its merchandise. That's why its gross margins are just 25%.
Another significant cost is in acquiring customers. Because, at the end of the day, there's nothing to stop a customer using Wayfair's online catalog for ideas, and then searching its online competitors for cheaper variations of the same product. After all, furniture is a costly purchase - not an impulsive purchase.
Having said that, one of the biggest costs for Wayfair is in acquiring new customers. If Wayfair is able to retain some of its newly found customers, this could be a meaningful driver of its operating leverage.
Indeed, throughout 2019, 53% of Wayfair.com orders came from customers who had made 3 or more lifetime purchases; in 2015, this figure was ~30%.
Hence, if Wayfair is able to retain its customer base, this could be very rewarding for Wayfair over time.
The Carrot for Investors?
Source: Investor Presentation Slide 33
As you can see above, Wayfair's future prospects in reality don't even look that enticing.
Consider this, at some point in the future, in the long term, Wayfair's best-case scenario will see its adjusted EBITDA margins hit 8%-10%.
Remember, these are not actual earnings, but earnings before pesky costs, such as stock-based compensation.
For the sake of our discussion, assuming we take the top end of its long-term margins, at which point Wayfair is able to consistently reach 10% of adjusted EBITDA margins, at that point, in the best case, investors should brace themselves for about $1.5 billion of EBITDA.
Assuming, of course, that Wayfair continues to grow its revenues and reaches $15 billion in sales. For that future-hypothetical point in time, investors are today already paying 11x EBITDA.
Put another way, even if Wayfair ultimately did reach this target in a timely manner, this would simply be justification for today's valuation - it would not carry its stock further ahead.
Would It Make For A Good Short?
Certainly not. Here are a few rules when it comes to shorting.
You don't short of valuation alone. Without a strong catalyst on the very near-term horizon, shorting is for bravados.
Next, you don't short a stock that is already 25% shorted and when shorts are clearly getting squeezed out.
Also, you don't short a stock that has so much optimism amongst its shareholder base. In fact, with the stock very close to all-time highs, this implies that nearly all of Wayfair's shareholders are presently holding gains.
Accordingly, shareholders are feeling very good about the stock and they would not be willing to give up their gains any time soon. Indeed, the best way to short a stock is once the stock is picking up negative sentiment - that's clearly not happening at present.
So What Should I Do?
This is a good time as any to start to layer away from your investment in Wayfair and start to move to the sidelines. Wayfair is not a buy and hold forever stock.
And even though the share price is going higher day after day, we should not be lulled into inaction, driven by a warm fuzzy feeling of having been vindicated for being a shareholder.
Indeed, I contend that staying invested at around a $16 billion market cap is too much risk for too little further reward, particularly when Bed Bath and Beyond's market cap is priced at a 90% discount compared with Wayfair.
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This article was written by
Michael Wiggins De Oliveira is an energy specialist whose primary focus is capitalizing on “the Great Energy Transition” - the confluence of decarbonization, digitalization with AI, and deglobalization - to achieve greater investment returns. Through his 9+ years analyzing countless companies, Michael has accumulated outstanding professional experience in the energy sector and a following of over 40K on Seeking Alpha.Michael is the leader of the investing group Deep Value Returns. Features of the group include: Insights through his concentrated portfolio of value stocks, timely updates on stock picks, a weekly webinar for live advice, and "hand-holding" as-needed for new and experienced investors alike. Deep Value Returns also has an active, vibrant, and kind community easily accessible via chat. Learn more.
Analyst’s 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.
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