About a fortnight ago, furniture-related stocks suffered a nasty jolt in the wake of Amazon.com, Inc.‘s (NASDAQ:AMZN) first foray into the furniture and home goods universe. Wayfair Inc (NYSE:W) fared worse than most, with W stock tanking nearly 7%, after the online retailer unveiled two new furnishing lines.
Rivet is Amazon’s take on rustic mid-century furniture, aimed at people who live a transient life (e.g. millennials). while Stone & Beam features slightly higher-end furniture geared towards families. The two lines come loaded with a host of Amazon-esque perks including mid-tier pricing, 30-day free returns, manufacturer warranties for as long as three years and, of course, free shipping.
Looks like Amazon is Wayfair’s new bogeyman?
Wayfair Isn’t Like the Others
W stock remains among the most-heavily shorted internet retailers.Yet, the shorts need to step back and take a 30,000-foot view of the company behind the stock.
Wayfair really is an antithesis of AMZN, which makes it largely protected from the apex predator of retail. Being the largest online-only furniture retailer in the country, Wayfair owns zero physical stores and only carries minimal inventory. The company has perfected the art of effectively undercutting traditional retailers by providing cheaper and faster shipping options, which customers seem to love — active customers jumped 38% during the last quarter to 10.3 million while average order size increased 2.5% to $250.
Wayfair is able to provide an almost endless assortment of products, something it manages by shipping directly to customers from its network of more than 7,000 suppliers. The company has built a well-oiled drop-ship model that allows customers to link up directly with vendors.
Amazon, on the other hand, makes about half its sales by selling merchandise directly from its stores. A first-party sales model inevitably leads to bloated operating costs and other logistical complexities. Further, the company’s existing distribution network is not optimized around furniture but rather on less bulky stuff, not to mention that doing home delivery of furniture will inevitably require extra staff to handle the setup and installation processes.
Ultimately, AMZN won’t be able to deploy a deadly weapon that it has unleashed against other retailers –low prices. Wayfair’s drop-ship model often means that a sofa that starts at $1,000 at another vendor goes for $600 at the online furniture retailer. Further, it will take time before Amazon can build out its supplier network to match Wayfair’s.
Meanwhile, Citron Research Weighed In
Notorious short-seller Citron Research is one of the top analysts that have been panning W stock for years. Citron Research’s beef with Wayfair mainly revolves around what CEO Andrew Left considers a broken business model with no hope of ever becoming profitable.
The firm doubled down on his short thesis in May. For the record, Citron has been short W stock since 2015, and has no doubt been badly burnt considering that W stock has continued taking out new all-time highs. Left, who cut his teeth as a boiler room scam investigator, gained notoriety after successfully betting against high-flying Valeant Pharmaceuticals Intl Inc (NYSE:VRX), accusing management of grossly inflating drug prices. The SEC launched investigations into the company and VRX shares tanked more than 90%.
— Citron Research (@CitronResearch) May 9, 2017
They say the key to prognostication is to sound certain when you know very little. Yet, Left’s sleuthing skills are beginning to appear real rusty, lately. Apart from the wrong call on W stock, his short thesis on Exact Science Corporation (NASDAQ:EXAS), Tesla Inc (NASDAQ:TSLA) and Nvidia Corporation (NASDAQ:NVDA) have not exactly panned out as expected. EXAS stock has been particularly defiant, and is now sitting on an eye-popping 344% YTD return (Citron PT of $20 vs. $57.95 at the close on Friday).
Long story short: do your own research and don’t drink the Citron Research Kool-Aid.
W Stock is a Bad Short Candidate
The biggest problem with Wayfair of course remains its lack of profits. The company spends tons of cash on marketing — at nearly $500 million, its ad budget is 10% of revenue, while customer acquisition costs run as high as $38 per customer. These line items really squeeze its already-thin operating margins, and the company needs to figure a way to keep them in check.
But trying to short W stock — a company growing the top line at a blistering near-40% clip — is sheer madness. Amazon got away with zero profits for years thanks to its glittering revenue growth. Nobody seems to know when Wayfair might become profitable — but ditto the old Amazon.
That W stock is up 97% YTD despite its dicey profit track record tells you that this market values growth above everything else.
Current indications are that Wayfair has strong growth runways and can keep growing like a weed for years. As long as things remain this way, neither AMZN nor the lack or profits is likely to bother the W stock bulls too much.
As of this writing, Brian Wu did not hold a position in any of the aforementioned securities.