Once upon a time, digital retailer Wayfair Inc (NYSE:W) was one of the hottest stocks in the market. That time wasn’t too long ago. In 2017, W stock rose 130% to $80. To start 2018, W stock rose another 25% to pass the $100 mark for the first time in company history.

But W stock has come crashing down over the past several weeks. Broad technology and valuation concerns have weighed on the stock tremendously (it was trading at nearly 2 times sales despite running huge losses).

Plus, the threat of a universal digital sales tax is only growing as the Supreme Court is set to hear arguments on the matter later this month. And, of course, there have been the doomsday calls from widely followed short-seller Citron Research.

Put it all together, and you had a red-hot stock with a big valuation that came under significant pressure. Net result? Wayfair stock dropped 30% in a hurry.

What’s next?

Hard to tell. Wayfair is an e-retailer with big top-line growth potential. But competition looms large, profitability remains a question mark, and legislation could provide a serious headwind.

All in all, I think the risk-reward profile on W stock skews toward the downside at these levels. Here’s why.

The Bull Case for Wayfair Stock

There is a case for W stock to head notably higher from current levels. That thesis, though, rests on some pretty big assumptions.

Namely, top-line growth won’t continue to decelerate meaningfully as it has over the past several years (70% in fiscal 2015, to 50% in fiscal 2016, to 40% in fiscal 2017).

The company will be able to reach Amazon.com, Inc. (NASDAQ:AMZN) levels of North American retail profitability within the next 3-5 years (Amazon’s North America retail operating profit margin was 4.5% last quarter).

And the Supreme Court will rule in favor of Wayfair in the digital sales tax argument, and digital sales taxes won’t be a headwind in the foreseeable future.

If all those are true, then Wayfair should be able to grow revenues by 25% per year over the next five years. Operating margins should hit 5%. That combination yields $14.4 billion in revenues and $720 million in operating profits in five years. Take out 21% for taxes and divide by presumably 95 million shares outstanding, and you get to roughly $6 in earnings per share.

A simple 20-times forward multiple on that gets you to a $120 price target in four years. Discounting that back by 10% per year, you arrive at a present value of just over $80 (roughly 20% upside).

The Bear Case for Wayfair Stock

The bear case on W stock, though, seems to hold more water than the bull case.

Top-line growth has been decelerating meaningfully over the past several years. Moreover, net revenue per customer has been flattish for the past several years. Same with orders per customer.

Thus, the big driver of revenue growth going forward will have to be customer growth. But that has come down meaningfully, too (67% in fiscal 2015, 54% in fiscal 2016, and 33% in fiscal 2017). Plus, competition from Amazon and others is only heating up.

Thus, the most likely outcome over the next several years is a continuation of that decelerating revenue growth trend.

Moreover, margins likely won’t come roaring higher any time soon. Amazon runs on 5% retail profit margins because they are the titan of the industry. Wayfair isn’t even close to Amazon’s scale, and because of that, Amazon’s profit margins should remain materially higher than Wayfair’s profit margins.

Meanwhile, the digital sales tax headwind is a wild card, and assuming something either way on that seems too risky.

All together, a more likely outcome for Wayfair is that the company grows revenues by 15-20% per year over the next five years, and margins run to 2-3%. At the midpoints, that would yield $10.6 billion in revenues and $264 million in operating profits in five years. Take out 21% for taxes and divide by 95 million diluted shares, and you get to roughly $2.20 in earnings per share.

A 20-times forward multiple on that gets you to a $44 price target in four years. Discounting that back by 10% per year, you arrive at a present value of just over $30 (more than 50% downside).

Bottom Line on W Stock

At current levels, I see 20% upside potential for W stock in a bull scenario, and 50% downside in a bear scenario. The bear scenario also looks more likely to me than the bull scenario.

Consequently, I think the risk-reward asymmetry on Wayfair stock skews toward the downside at current levels.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.