The Meteoric Rally in Wayfair Stock Still has Some Juice Left in it

Shares of online furniture retailer Wayfair (NYSE:W) have been on fire in 2020 as the novel coronavirus pandemic has accelerated global e-commerce adoption. Year-to-date, Wayfair stock has surged 150% to all-time highs.

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A few pundits are saying that this rally is overdone. They point to two big reasons why Wayfair stock will reverse course.

One, the Covid-19 pandemic won’t last forever, nor will the e-commerce adoption tailwinds that have accompanied a global economic shutdown. Two, the stock trades at its richest valuation, ever.

Here’s my response.

To be sure, the pandemic won’t last forever, but its impact on consumer shopping behaviors will. Also, given recent sales and the acceleration of volume growth — which have unlocked economies of scale and margin expansion — today’s valuation is reasonable.

As such, I say stick with the rally in Wayfair stock. Prices closer to $240 look doable in 2020.

Here’s a deeper look.

Covid-19 Permanently Accelerated E-furniture Adoption

In the big picture, Covid-19 has permanently accelerated e-commerce adoption across all shopping verticals, and particularly in verticals which were under-penetrated prior to the pandemic, like furniture.

Before March 2020, shopping online was a choice. You didn’t have to do it. You could go to a store if you wanted.

In the last four months, however, shopping online has been a requirement. If you wanted to buy something, you had to do it online, because all non-essential stores were closed. The Global X Funds – Global X E-commerce ETF (NASDAQ:EBIZ) is up 85% from its mid-March low. Wayfair stock is that exchange-traded fund’s largest holding, at 6.95% of a 40-stock portfolio.

Of course, this dynamic won’t last forever. It’s already waning. Non-essential stores are reopening everywhere. Online shopping is now mostly a choice again.

But online retail sales trends haven’t slowed amid physical store re-openings. Instead, according to JPMorgan’s daily credit card data, online spending trends have accelerated throughout June and July to their highest levels since the pandemic emerged.

Why? Because when all consumers were forced into online retail channels in April and May, they fell in love with the experience.

The reality is that, thanks to logistics improvements such as free next-day delivery and technological improvements like chatbots and data-driven assortment curation, the online shopping experience has been transformed over the past few years to become just as robust as — if not more robust than — the physical shopping experience, with elevated experience.

So of all those consumers that pivoted to online retail in April and May, most stuck. Most will increase their online retail spend not just today, but also over the next few years.

To that end, the Covid-19 pandemic isn’t a near-term tailwind for Wayfair stock. It’s a long-term boost, which will accelerate the company’s growth trajectory for many years.

Economies of Scale Warrant Premium Valuation

Meanwhile, on the valuation front, the big thing to understand here is economies of scale.

Wayfair has forever been a big revenue growth company. But the e-retailer has yet to strike a profit. And that’s because the company has yet to get big enough to a point where the company can meaningfully benefit from economies of scale.

Until now. Until Covid-19.

The Covid-19 pandemic has created such an enormous volume surge — gross revenue in Q2 was trending up 90% year-over-year in early May — that economies of scale are now kicking in, and Wayfair is expecting to report positive adjusted EBITDA for the first time ever this year.

The margin expansion growth narrative has begun.

And it won’t stop anytime soon. Over the next few years, sustained large revenue growth will continue to allow the company to benefit from further economies of scale and drive margins higher, turning what was a hugely unprofitable retailer in 2019, into a strongly profitable merchant.

My numbers suggest that, so long as Wayfair continues on this favorable growth trajectory, $25 in earnings per share is doable by 2030.

Based on a consumer discretionary sector-average 20x forward earnings multiple and an 8.5% discount rate, that implies a 2020 price target for Wayfair stock of $240.

Bottom Line on Wayfair Stock

Has the best of the 2020 rally in Wayfair stock already happened? Yes. Absolutely. The stock is not going to rally another 150% from here.

But is the rally over? No. Not at all. Wayfair stock can and will likely rally another 10% over the next ~6 months.

That’s pretty good upside potential, in a world with record low interest rates and fixed income yields.

So I say, stick with the rally in Wayfair stock.

Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not own a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/07/the-meteoric-rally-in-wayfair-stock-still-has-some-juice-left-in-it/.

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