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Wayfair: Momentum Hides Risk-Reward Imbalance

Jun. 08, 2020 2:14 PM ETWayfair Inc. (W)13 Comments


  • 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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Investment Thesis

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

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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.

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Comments (13)

Value Digger profile picture
Another wake up call today. Wayfair's insiders keep selling, according to the latest filings below:


6/17/2020 Steve Oblak Insider Sell 2,196 $194.68 $427,517.28

6/16/2020 Michael D Fleisher CFO Sell 458 $195.75 $89,653.50

6/15/2020 James R Miller CTO Sell 218 $184.18 $40,151.24

6/15/2020 Steve Oblak Insider Sell 5,025 $199.02 $1,000,075.50

6/1/2020 Edmond Macri Insider Sell 1,000 $172.68 $172,680.00

5/19/2020 Edmond Macri Insider Sell 300 $156.20 $46,860.00

5/19/2020 Michael D Fleisher CFO Sell 1,684 $156.20 $263,040.80

5/12/2020 Edmond Macri Insider Sell 300 $192.24 $57,672.00

5/7/2020 Robert James Gamgort Director Sell 6,200 $180.00 $1,116,000.00

5/5/2020 Michael D Fleisher CFO Sell 26,016 $174.32 $4,535,109.12

5/5/2020 Steve Oblak Insider Sell 12,628 $174.32 $2,201,312.96
Value Digger profile picture
Investors need to ask themselves whether they want to own shares of Wayfair (W) at $20 (let alone at $190) given that this unprofitable cash-burning heavily-indebted company with the low gross profit margin has too many poor reviews.

Specifically, Wayfair (W) keeps having many poor reviews, as shown below:


and below:

Value Digger profile picture
Also, Wayfair's (W) working capital (current assets - current liabilities) remains deeply NEGATIVE at about $220 million in Q1 2020.

This working capital is a measure of the company's operational efficiency and financial health and W's large working capital DEFICIT clearly indicates that Wayfair keeps having trouble paying back creditors.

Wayfair's (W) working capital has been negative for an extended period of time and extended periods of negative working capital lead to insolvency and bankruptcy.

All these ugly fundamentals will weigh on the stock sooner or later.

Hype and insanity can't last indefinitely.
Value Digger profile picture
Another example.

At $180 per share, Wayfair's (W) Enterprise Value including net debt of $700 million exceeds $18 billion.

So Wayfair's Enterprise Value currently is MORE than 2 times the annual revenue.

Overstock (OSTK) is another online retailer from the home furnishings sector and OSTK's Enterprise Value currently is LESS than 1 times the annual revenue.
Value Digger profile picture
At $180 per share, Wayfair's (W) Enterprise Value including net debt of $700 million exceeds $18 billion.

Even if Wayfair (W) makes annual positive adjusted EBITDA (or "bullshit earnings" according to Charlie Munger) $100 million or even $200 million one day, the Enterprise Value-to-adj. EBITDA ratio is from 90 times to 180 times.

EV-to-adj. EBITDA ratio at 180 times or 90 times is insanely high with the risk-reward being to the downside.

And insanely high is an understatement.
Thank you for the article and analysis. Wayfair can't justify it's stock price and I question it's long term viability as a serious contender in this space. As you outlined, competition is going to heat up in the short term with over inventoried brick and mortar retailers that have been ramping their omni-channel capabilities offering steep discounts. In the long run I think that these omni-channel capabilities are going to capture customers to be more brand loyal as they can go view the quality of the furniture in person and feel more comfortable ordering online.

Everywhere you look Wayfair has poor reviews, real easy to lose customers over one poor experience. The only direction Wayfair is going is down.
Michael Wiggins De Oliveira profile picture
@Money Mover
Yes, but momentum can carry stock for a long time too. So that's something to keep in mind.
UI dries up at the end of July, wayfair, home depot, lowes.......
Value Digger profile picture
There are many reasons for the strong sales from RH (RH), Macy's (M), Big Lots (BIG) and many other brick-and-mortar furniture stores since their re-opening such as:

1) Consumers rush to exploit the liquidations and massive discounts of up to 70% because the stores want to get rid of their winter and spring inventory.

2) When consumers shop home furnishing items, seeing and touching the item in person in a store or warehouse gives a better perspective of how that item or furniture piece will fit within their home. E-tailers have the disadvantage in this case and an item might look perfect online, but you can't know how it will look on its real dimensions in your house.

3) Now that the U.S. is re-opening, there is a craving for Brick-and-Mortar shopping therapy after many weeks at home.

4) The warm weather is the icing on the cake and attracts people to go out and enjoy the sun.
Michael Wiggins De Oliveira profile picture
@Value Digger
Point 3). Yeap, you got me 100% on that one.
Value Digger profile picture
See Macy's (M) preliminary results today. They prove that the temporary COVID-19 revenue growth for the online home furnishing retailers such as Wayfair (W) is over.

After the latest strong sales from RH (RH) and Big Lots (BIG) since their re-opening, Macy's (M) brick-and-mortar stores are back too with strong sales exceeding expectations, as shown below:

stuck profile picture
With the current "consumer" conditions out there, I know plenty more people who have purchased many products online. Wayfair is one of the companies they have used. I have found in asking people about their experience and the products for my own purchase reference, that no one had anything good to say about the products and customer service of Wayfair. I totally understand that in today's stock market, no one cares about product quality and customer service issues of these on line retailers, but I am old school and actually still look at the company from both a product and service aspect and I even review the financial statements....Imagine that. This company sells crap. When the furniture purchased could not be properly put together because of poorly fitted pieces, it took days to contact anyone at Wayfair. They then complained that shipping was not possible for the return of partially assembled furniture and after more calls, they finally offered a product credit to purchase more poor quality items. Do what you want with the stock, but stay away from the products. They are low quality, poorly made products, With that, I will set a price target on the stock to up 50% from here based on the market momentum that is driving the unknown.
I encourage everyone to Google "Wayfair Reviews" and check out their Facebook page especially their communities. Horrible consumer service. It looks like their one chance to increase their consumer base has failed.

I highly doubtful they hit expectations Q2. I'm looking into short Wayfair down below $100. Could even see $75 or lower come end of 2020.
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