Once the darlings of Wall Street, high-flying tech stocks have lost their shine during this month’s selloff. Most high-flying tech stocks, from mega-caps like Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX) to smaller caps like Shopify (NYSE:SHOP), Square (NYSE:SQ) and Roku (NASDAQ:ROKU) are in bear-market territory, all thanks to slowing growth and the threat of higher interest rates.

One high-flying tech stock that has been hit especially hard is furniture e-retailer Wayfair (NYSE:W). Wayfair was once one of the hottest names in the tech sector. In the span of five months from May to September, Wayfair stock more than doubled, jumping from $60 to $150.

Then the selloff hit, and Wayfair stock dropped more than 30% in two months. Today W stock trades around $110.

Wayfair is set to report its third-quarter earnings before the bell tomorrow. Wayfair earnings could go one of two ways. Either the numbers will indicate that concerns about growth are warranted, causing Wayfair stock to drop even further or the numbers will confirm that the company’s long-term secular growth outlook is intact, and beaten-up Wayfair stock will rebound.

At this point in time, the latter scenario seems more likely. Current trends seem to indicate that Wayfair is gaining share of the e-commerce market, and Wayfair earnings should be quite good. That positive print should cause Wayfair stock to rally. But the sustainability of that rally will be tested in this market. Thus, although Wayfair stock should jump after Wayfair earnings, there are macro risks which threaten the longevity of that rally.

Wayfair’s Numbers Should Be Good

Wayfair sells furniture over the internet. Consequently, as long as the overall outlook of the e-commerce sector remains strong, consumers remain healthy, and competition remains muted, Wayfair should report strong numbers.

All three of those trends have remained intact over the past several quarters.

The outlook of e-commerce remains strong. Retail e-commerce sales in the U.S. rose 15.2% year-over-year in the second quarter of 2018, versus 15.5% growth in the second quarter of 2017. That is a meaningless slowdown, and the broad takeaway is that e-commerce growth remains over 15% despite tough comparisons.

Meanwhile, consumers remain healthy. Total retail sales jumped nearly 6% over the past three months, versus a 4% increase in the same period one year ago, and all signs indicate that this robust strength will continue, as consumer confidence reached an 18-year high this month.

On the competition front, a big driver behind the recent decline of Wayfair stock is reinvigorated competition from Amazon. Over the past few months, Amazon has launched Storefronts (a new small business-oriented commerce platform), Scout (a furniture-oriented commerce and recommendation platform), and Ravenna Home (a private-label furniture brand). The sum of these initiatives made it seem like Amazon was more seriously attacking Wayfair’s core furniture market.

But Amazon’s numbers implied that these initiatives didn’t gain much traction. The growth of Amazon’s overall e-commerce business slowed meaningfully in Q3. The sales of the company’s online stores rose just 11% year-over-year, versus a 22% increase in the third quarter of 2017. Third-party sellers’ services revenue rose just 32% in the third quarter of 2018, versus a 40% jump in the same quarter a year earlier.

Despite Amazon’s slowdown, the growth of the overall e-commerce sector has remained robust over the past twelve months and has slowed by just a fraction of a percent. But Amazon’s growth has slowed by several percentage points. That means that as e-commerce gets bigger, it is becoming democratized. Gone are the days of Amazon owning 50% of the U.S. e-commerce market. Instead, now every retailer has a digital presence, and market share is being spread more equally.

That is a positive trend for Wayfair, since the company controls a very small part of the e-commerce pie. As e-commerce gets democratized over the next several years, Wayfair ‘s market share should expand at a healthy rate.

Overall, all signs indicate that Wayfair earnings will be quite good. If the results are positive, beaten -up Wayfair stock could undergo a relief rally. But market weakness and valuation will threaten the sustainability of that rally.

Wayfair Stock Could Pop, But Market Weakness Risks Remain

Heading into the Q3 print, Wayfair stock has really been beaten up.

It has dropped more than 30% over the past two months. As a result, W stock has fallen into oversold territory. The price-sales multiple of Wayfair stock has dropped 30% and sits at just 1.6, well below Amazon’s price-sales multiple of 3.4. And W stock now sits more than 20% below analysts’ consensus price target.

In other words, Wayfair stock is depressed heading into the company’s Q3 results. That means a positive print should spark a nice relief rally.

But in October, seemingly every stock market rally has been short-circuited by sellers, and stocks haven’t really been boosted by any meaningful or sustainable relief rally. Until investors’ sentiment improves, it will be tough for W stock to reclaim its highs.

Also, valuation is a problem for W stock. The price-sales multiple of W stock is attractive. But this company generates huge losses that are expected to continue for a very long time. Consequently, Wayfair stock derives most of its value from profits that won’t materialize for many years. But profits that are still way down the road are worth way less when interest rates are rising. Thus, the valuation of Wayfair stock will be challenged going forward.

The Bottom Line on W Stock

Wayfair stock is a long-term secular winner that has been massively beaten up ahead of what should be positive Wayfair earnings. The stock will bounce higher following the company’s Q3 results, but the sustainability of any post-earnings rally will be challenged by dour investor sentiment and a stretched valuation.

As of this writing, Luke Lango was long FB, AMZN, NFLX, SHOP, SQ and ROKU.