Editor’s note: This column is part of our Best Stocks for 2020 contest. Jason Moser’s pick for the contest is Wayfair (NYSE:W).
Wayfair (NYSE:W) is an e-commerce business that sells home furnishings and improvement. In fact, chances are pretty good you’ve already used it as it operates under brands including Wayfair, Joss & Main, AllModern, Birch Lane and Perigold. At its core though, Wayfair is a network and that’s one of the reasons I like it as an investment.
You see, Wayfair doesn’t really hold much in the way of inventory. Rather it connects its 19.1 million active customers with over 11,000 suppliers from all over the country. It’s changed the way we shop for furniture and home goods and I think the good times are just getting started.
There’s a Lot to Like
An attractive part of Wayfair’s business is the size of the market opportunity it’s pursuing. The United States, which is the company’s largest market today, is estimated to be a $285 billion opportunity according to management. While I’ll be the first to admit that’s likely bigger than what is relevant to Wayfair’s business today, when you compare it to the company’s $8.6 billion in trailing-twelve month revenue it’s plain to see there’s a lot of room for growth.
Speaking of growth, Wayfair has grown revenue at a compound annualized rate of just under 50% over the last five years. There aren’t many businesses out there chalking up those kinds of numbers, and there’s more. Check out this chart below going all the way back to 2013:
There are some important things to note here. Gross margin is holding the line which matters because the company’s cost of goods sold includes shipping and fulfillment costs, arguably one of the bigger concerns for investors. I mean it’s one thing to get a pillow from point A to point B. It’s another thing entirely to do that with a couch or a bathroom vanity.
Another important metric is the percentage of orders placed by repeat customers. A big expense for any company is acquiring new customers, so once you get them, you want to keep them. Over time, those acquisition costs come down and profitability becomes more apparent. In Wayfair’s case we can see that over time it’s done a fantastic job keeping the customers it acquires and I think that’s for a number of reasons. It’s a superior shopping experience and management also understands the power of excellent customer service.
Things I’ll Be Watching
Early on Wayfair’s biggest risk was one word: Amazon (NASDAQ:AMZN). Honestly I was a bit surprised that Amazon didn’t acquire Wayfair before it went public. But over time this risk has dwindled and I expect that to continue. No, I don’t think management can ever put Amazon in its rearview mirror (let’s face it, competition should keep the company on its game), but Wayfair has established itself as a real presence in today’s e-commerce environment.
Another risk that has grown in recent quarters is the ongoing trade war with China. It isn’t specific to just Wayfair, but it’s a short-term concern that played a role in the recent earnings selloff that sent shares down almost 19% in a day. While this is a risk in the near term, investors that take the longer view as I do should see this as an opportunity. At some point the tariff talk will be in the rearview mirror and shares will reflect that good news. As management noted on the most recent earnings call:
“Since the beginning of the year, more than 90% of our suppliers who are subject to China tariffs have raised wholesale prices, which have resulted in higher retail prices,” CFO Michael Fleisher said. “As retail prices on the site fluctuate, we observed that our customers’ consideration cycle gets disrupted and is effectively lengthened.”
Co-founders Niraj Shah and Steven Conine have built quite the track record, but it’s worth noting that through their ownership of Class B shares they hold over 32% of the economic interest in the business and over 82% of the voting power. In short, their success or failure will be Wayfair’s success or failure. We’re counting on them being good stewards of the business and shareholders.
Making Sense of the Numbers
Sooner or later Wayfair is going to need to start reporting profits. As it stands today the business continues to lose money as management invests heavily in becoming not only a dominant presence domestically, but globally as well. For now investors will need to be content with the potential of the business and the recent selloff that has shares trading at less than one time sales (for context Amazon trades for around 3.3 times sales today). The balance sheet is in relatively good shape with $1.3 billion in cash versus $2.3 billion in debt.
The Bottom Line for Investing in 2020
If you haven’t heard of Wayfair by now I’m going to assume that you’re living under a rock. As the retail landscape continues to evolve and e-commerce continues to grow its share of the pie, Wayfair stands out as not only an investment that should see better days in 2020, but many years beyond.
As of this writing, Jason Moser, a senior analyst with The Motley Fool, held shares of AMZN.
