Wayfair Stock Will Survive the Outbreak But It Must Get Profitable

Wayfair's history of losses and negative FCF has to turn around for Wayfair stock to rebound

Wayfair (NYSE:W) stock is down significantly along with other major retailers. But the company has a major advantage — its sales are completely online. People are getting used to buying furniture online, so the company can survive on its huge growth. But Wayfair stock won’t recover until the company heads toward profitability.

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The Wall Street Journal recently wrote about Wayfair’s history of copying Amazon (NASDAQ:AMZN), growing quickly online. This copying also led to a long string of losses over two decades of its existence.

However, now the company is looking to turn profitable. Its latest quarterly loss of $330 million was twice that from a year ago. This was despite the fact that quarterly sales rose 26% from a year before.

The company recently laid off 550 people after hiring thousands in the past several years. Moreover, Wayfair said it would start cutting operating costs such as advertising.

In February, Wayfair CEO Niraj Shah said that it would take until 2021 before the company can generate consistent operating profits. This is likely prolonged now that the coronavirus from China has dampened demand for its furniture.

These operating profits are the key for Wayfair stock to recover. The Wall Street Journal pointed out that investors’ appetite for money-losing online companies has waned significantly in the past year.

What Analysts Are Saying About Wayfair Stock

However, consider this. Argus analyst Jim Kelleher recently upgraded the stock to “buy” from “hold.” His model sees double-digit revenue growth for much of the coming decade.

So if the company can cut operating costs while still booking 20% compound annual growth over the next two years it can get profitable. Then Wayfair stock can recover from its lows.

But not so fast. Some analysts are deeply skeptical. Seeking Alpha group BOOX Research recently wrote that Wayfair’s “growth-at-all-cost” model is fundamentally flawed. The furniture business is typically a slim margin business.

They believe that recurring negative free cash flow and weak financial metrics will continue to weigh on Wayfair stock’s sentiment. It’s unclear if the business model can ever reach consistent profitability.

They cite several factors in their analysis. One is the decline in the average order value to $226 from $227. Another is the FCF loss of $598 million in 2019 compared to a loss of $137 million in 2018. Wayfair’s unbridled spending led to these unsustainable losses.

The last factor is the company’s decelerating rate of revenue growth on a year-over-year basis.

So, analysts are mixed in their review of Wayfair stock. But much of the bad news seems to be already discounted in today’s Wayfair stock price.

The Bottom Line on Wayfair

At the end of February, famous short seller Andrew Left, who runs Citron Research, closed out his short bet on Wayfair stock. He was shorting the stock for the past four years, including when it was trading over $150 per share. He used to call it the “anti-Amazon” stock.

Maybe he closed out a bit early. But one thing is certain, much of the bad news is already discounted in Wayfair stock.

At this point, if the company can survive the coronavirus devastation, it is tempting to start nibbling on Wayfair stock. Maybe the company can find religion, start cutting its cost base and produce operating profits.

The problem is the market is in a “show-me” mindset. It is probably better to wait and see if the next several quarters show that the company can get its act together in terms of moving toward profitability.

As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here.


Article printed from InvestorPlace Media, https://investorplace.com/2020/03/wayfair-stock-needs-profitability/.

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