At shares trade just below their all-time highs, should you dive into Wayfair (NYSE:W)? Wayfair stock has rallied more than 275% so far this year.
Since last spring’s pandemic-driven sell-off, shares are up more than 15-fold. Granted, there’s good reason why this stock made the “mother of all comebacks” during the novel coronavirus lockdown period.
With millions stuck at home for work and play, anything e-commerce experienced a tremendous tailwind. But, while this online retailer has seen solid growth in the past five months, does that make it worthy of today’s premium valuation?
On one hand, if the new normal means a permanent shift to online shopping for things like home goods, expect the solid performance of Wayfair stock to continue. While valuation today looks very high, accelerating growth could more than make up for it.
On the other hand, what if Wayfair isn’t the next Amazon (NASDAQ:AMZN)? That is to say, while the company is experiencing tailwinds right now, it lacks the e-commerce powerhouse’s deep economic moat. Also, with Amazon moving more into the company’s turf, competitive risks may be on the rise.
Add in other red flags (more below), and this does not look like a great opportunity at today’s prices. If you got in early, now’s the time to cash out.
Wayfair Stock Is Running Out of Runway
As InvestorPlace’s Nick Clarkson wrote Aug. 5, the company knocked it out of the park with second quarter earnings. Sales of $4.3 billion for the quarter ending June 30 handily beat Wall Street’s $4 billion projections. Adjusted earnings of $3.13 per share crushed their consensus of $1.04 per share.
Sure, with numbers like these, it’s no surprise Wayfair remains a high flyer. Yet, given the company did not provide guidance for the full year, who’s to say we’ll see continued strong results in the subsequent quarters?
Also, the strong performance as of late may be due only to today’s unique circumstances. Americans may still be flocking to big box discount stores like Target (NYSE:TGT), but, mall-based retail continues to struggle. Yes, lockdowns are over and malls have reopened, but who wants to deal with social distancing just to buy home furnishings in person? This benefits online-only home goods retailers like this company.
Second, federal government stimulus provided plenty of spending money for American households, even as the pandemic caused decades-high unemployment. Between the increased unemployment checks, and the $1,200 most Americans received, there was more than enough to bolster consumer demand.
Third, with travel and other outdoor leisure activities limited, what else was there to spend money on? Obviously, this drove more discretionary spending towards things like home goods.
Yet, these three trends, so far friends to Wayfair stock, could be soon running out of gas. And, without them, don’t expect shares to head any higher than they are today.
Fewer Catalysts, But More Risks
On Aug. 14, S&P Global Market Intelligence released its list of the most vulnerable public American retailers. Despite the blockbuster results as of late, Wayfair ranked on the list.
Why? After all, most of the retailers listed were hard-hit mall-based names like Destination XL (NASDAQ:DXLG) and J.Jill (NYSE:JILL). What makes this company, “crushing it” in terms of sales and earnings, have the same one and two-year odds of default as those two near-bankrupt companies?
As Neil Saunders of GlobalData Retail put it, “online penetration levels in furniture and home furnishings have dropped from their peak in April.” That is to say, as lockdowns have ended, and Americans have started to buy home goods at bricks-and-mortar locations again, don’t expect Wayfair’s near-term strength to continue.
But, that’s not all. As InvestorPlace’s Dana Blankenhorn wrote late last month, Amazon has a clear edge over Wayfair when it comes to dominating the home furnishings space, and not just due to its economies-of-scale advantage.
With the e-commerce powerhouse increasing advertising in this vertical, this heavy competition could also start to affect Wayfair’s growth potential.
Bottom line: with more risks than catalysts, buying shares while they remain richly priced does not look like a strong proposition.
Sell Now Before It Turns Around
With America still in pandemic mode, it’s easy to think the salad days will continue for Wayfair. But, with signs this year’s tailwinds are a “one-and-done” event, there may be little upside left on the table.
Instead, investors buying in at today’s prices have plenty of risks to consider. Between red flags like the S&P report, along with competitive risks from Amazon, now’s not the time to buy Wayfair stock. If you bought at lower prices, sell. Otherwise, avoid shares completely.
Thomas Niel, contributor to InvestorPlace, has written single-stock analysis since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.