The Contrarian View on Wayfair Stock

It was a tough weekend.

First, I heard from a reader who wasn’t happy about my April 2017 call to buy Kraft Heinz (NYSE:KHC) for the next decade. That hurt. Then I read about Wayfair’s (NYSE:W) impressive sales results in the fourth quarter. I’m long a Wayfair detractor, but Wayfair stock continues to rocket higher.

Why, Inc. Buying Wayfair Stock Is a Bad Idea

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Wayfair delivered strong Q4 sales Feb. 22 sending Wayfair stock 28% higher on the day, making it a clear favorite amongst consumer-facing stocks.

Most shorts are exiting their positions on the news, not wanting to get run over by Wayfair stock’s momentum. Smart. However, I don’t have a dog in this fight, so I’m able to evaluate the new information without worrying about whether I should be buying or selling.

First, let’s consider what the analysts have to say about Wayfair’s performance.

Investors Like Wayfair Stock

Oppenheimer analyst Brian Nagel has a 12-month price target of $140 (W stock is already well above that) suggesting that its house brands are attracting a lot of customers. More importantly, repeat customers accounted for two-thirds of its orders in the fourth quarter, a company record. Recurring revenue is the Holy Grail of sales.

W delivers a W in the fourth quarter,” Nagel wrote to clients. “As the Wayfair model continues to take shape, we expect more traditional consumer-type money to flow into these shares.”

Investors looking for good long-term consumer stocks to own are favoring Wayfair stock, which sits within 5% of its all-time high of $156.78. Given nine analysts out of 18 have it as a buy, with only two recommending it be underweighted or sold, that’s probably enough for existing investors to ride its hot streak.    

Gaining Economic Scale

Wayfair’s business model is simple: Grow top-line sales until it owns a big chunk of the household goods sector. By forgoing profits to build sufficient infrastructure including logistics, it will eventually be able to raise prices and deliver gobs of profits.

So far, some analysts believe Wayfair’s strategy is working as planned.

“[Wayfair’s] early mover advantage in the home furnishings category to prove sustainable, with its best-in-class selection, personalized marketing, and price leadership as its key competitive advantages,” wrote Loop Capital analyst Laura Champine.

Champine has a “buy” rating and a $155 price target, up $10 from her previous mark.

The Contrarian View on Wayfair Stock

D.A. Davidson analyst Tom Forte has an “underperform” rating on W stock and a $60 target price, less than half the current Wayfair stock price. He doesn’t believe the company can grow sales at its current rate without maintaining its high level of advertising dollars, etc.

It’s spending too much money to grab market share that it might not be able to hang on to over the long haul. I’m sure Amazon (NASDAQ:AMZN) will have something to say about this in the future. 

Wayfair CEO Niraj Shah believes that its customers want to own unique items that aren’t the same as everyone else. My wife and I have ordered one piece from Wayfair — a set of four breakfast nook chairs — and they’re anything but unique. Maybe we’re not the target audience, but this kind of rhetoric is marketing speak at best.

Wayfair Stock Just Isn’t There Yet

For me, it all comes down to advertising dollars spent to acquire a new customer.

Wayfair finished Q4 with 15.2 million active customers in its direct retail business, 9.4% higher than in Q3. It spent $232.4 million on advertising in Q4, 14.7% higher than the $202.6 million it spent in the Q3.

That means it spent $15.29 in advertising per active customer in Q4, 4.9% higher than the $14.58 it spent on advertising per active customer in Q3. More importantly, it spent $22.92 [$232.4M – $202.6 million / 15.2 million – 13.9 million] on advertising for each of the 1.3 million active customers it added in Q4, 19 cents more than it spent in Q3.

Although that’s less than a 1% increase, it suggests Wayfair still hasn’t reached a level of maturity that allows it to lower its ad spend to bring in new customers.

Until it can dramatically reduce its cost to attract additional active customers, it’s unlikely to make money. Except for maybe Tesla (NASDAQ:TSLA), I’m not interested in owning money losers.

So, I’ll continue to pass despite the run-up.

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

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