On Tuesday, the S&P 500 and Nasdaq hit new all-time highs. Sure Netflix, Inc. (NASDAQ:NFLX) was a big driving force behind that move with its 10% rally. But others are helping push it as well. For instance, there’s Wayfair Inc (NYSE:W). W stock is quickly up 12.4% this year and it made new all-time highs on Monday.
But some are still wondering, is W stock worth buying?
I have been a big believer in the U.S. over the past six to nine months. The strong economy and consumer confidence have a positive trickle down effect for companies like Citigroup Inc (NYSE:C) and Home Depot Inc (NYSE:HD), and even names like Activision Blizzard, Inc. (NYSE:ATVI). However, retail has been a big winner too — and it certainly enjoyed a strong fourth quarter.
While that’s good for companies like Kohl’s Corporation (NYSE:KSS), e-commerce plays like Amazon.com, Inc. (NASDAQ:AMZN) also did well. The question is, how well did Wayfair do?
We won’t know until the company reports earnings on Feb. 22. So until then, we’ll have to take our clues from other e-commerce companies that report before then.
W Stock Fundamentals
Without any direction from the company, where does that leave us with Wayfair on the fundamental front? Its fundamentals could be better, surely, but its valuation isn’t as absurd as one might think.
On the downside, Wayfair will lose roughly $1.90-per-share this year. Analysts expect that loss to shrink to $1.25-per-share for 2018. On the plus side, it’s reducing its losses by more than one-third year-over-year.
Another note is cash flow. On a free-cash flow (FCF) and operating cash flow (OCF) basis, Wayfair will more than likely go positive for the year when it releases its fourth-quarter results. It’s worth pointing out that 2017 FCF and OCF declined from 2016. OCF fell by about 50%, while FCF fell from a positive $63 million to negative $65 million.
So this year will be quite important as to whether cash flows rebound in the right direction. Positive FCF would be big for a company looking to stymie its losses.
Then there’s revenue growth. On the plus side, analysts expect almost 29% revenue growth in 2018. On the downside, that’s less than the roughly 38% sales growth W stock had for 2017. So while 29% growth is great, it’s also down almost 25% year-over-year.
For this though, we’re only paying 1.9x its trailing 12 months of sales. That’s really not that expensive of a price — on a sales basis anyway — for a company like Wayfair. It’s quickly carving out a niche in the online furniture/decoration business.
However, competition could increase for Wayfair from Overstock.com Inc (NASDAQ:OSTK). Also, Amazon recently introduced its new online furniture department. Further, I would be more inclined to buy W stock if it hadn’t run so much to its current levels.
Trading W Stock
W stock seems to be tipping more positive than negative at the moment. However, with shares a stone’s throw away from all-time highs, now may not be the time to initiate a new position. Granted, if you’re already long, this momentum is very much a relief.
Shares fell from almost $85 in mid-September to $55 in early November. W stock has impressively ramped to $90 since though, up more than 60% in about ten weeks. That begs the question, what now?
I simply can’t buy a stock after a run like this without waiting for a pullback. With the market rallying nonstop, a market-wide pullback of some magnitude is bound to materialize. Basing our investment thesis on that rhetoric, I don’t think W stock would be the first thing on my go-to list should we get a correction in the Nasdaq.
Other names like Nvidia Corporation (NASDAQ:NVDA), Advanced Micro Devices, Inc. (NASDAQ:AMD), Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), Apple Inc. (NASDAQ:AAPL) and Salesforce.com, Inc. (NASDAQ:CRM) is where I’d look.
These stocks have better fundamentals and a more attractive valuation. Based on prior resistance, W stock looks extended and its upside appears limited. Based on this chart, I would feel pressure to take profits. This is particularly true if Wayfair stock were a trade — not an investment — and failed to breakout over $92.
I’m not saying Wayfair stock is bad. I’m just saying that I need a better price first. Let’s see how it trades if it gets near $75 and whether the 200-day moving average is any help when it comes to support.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, he was long CRM.
