Shares of Wayfair (NYSE:W) popped to all time highs in early August after the online home decor retailer reported second quarter numbers which blasted past expectations and broadly underscored one simple reality: Thanks to Covid-19, Wayfair is turning into the Amazon (NASDAQ:AMZN) of the furniture category.

Wayfair stock now trades hands above $300.

For perspective, this was a $20 stock in mid-March… implying a 15-fold rally in less than five months.

Wayfair stock can’t possibly go any higher, can’t it?

It can.

Here’s why.

Strong Wayfair Earnings

Wayfair’s earnings were very strong.

U.S. revenues rose 82.5% year-over-year. International revenues rose 90.5%. Total revenues rose 83.7%. The number of active customers was up 46%. Average revenue per customer was up 1.6%. Quarter-to-date, revenues are up about 70%.

Gross margins hit a record high 30.7%, versus ~23% over the past few years. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) margins also hit a record high of 10.2%, versus negative territory in previous years.

Broadly, the quarter confirmed two things.

One, everyone and their best friend pivoted towards buying furniture online during the coronavirus pandemic, they liked the experience they found and they’ve continued to shop in the online channel ever since, even as physical furniture shops have reopened. To that end, it appears Covid-19 has permanently accelerated the shift towards home decor and furniture e-commerce… and permanently accelerated Wayfair’s growth trajectory.

Two, the economies of scale benefits that Wayfair has been touting for years is more than just hype. It’s the real deal. Scale has arrived. And margins are booming towards the high-end and even above management’s long-term targets.

With those two things confirmed, Wayfair has clear visibility to turn into the Amazon of furniture over the next 5 to 10 years.

The Amazon of Furniture

Wayfair is turning into the Amazon of furniture, and that implies big upside potential for Wayfair stock.

Here’s the story.

For years, consumers preferred to buy furniture in-store. This preference has kept e-commerce penetration rates in the furniture category depressed. In 2019, e-retail penetration in the home goods category measured just 13%, versus 30% penetration in apparel and 43% penetration in consumer electronics.

But the Covid-19 pandemic has forced consumers to adopt e-commerce in furniture retail, because furniture stores broadly closed through March, April and May.

They’ve since reopened in June and July. But consumers aren’t going back. Instead, they are sticking in the online channel, where Wayfair is still reporting 70%-plus revenue growth.

Why?

Because the reality is that the online shopping experience for furniture has dramatically improved to the point where it’s just as robust (and significantly more convenient) than the physical shopping experience. That is, thanks to next-gen AR features like “View in Room 3D”, consumers can dynamically visualize furniture they are browsing on Wayfair, in their own homes, without having to go anywhere.

Meanwhile, Wayfair still offers great prices, fast shipping, easy comparability, access to tons of reviews, etc.

In other words, the frictions which kept consumers from shopping for furniture online have been removed, while the value props have only grown more prominent.

Accordingly, all those consumers who flocked to online furniture platforms in the first half of 2020, will stick. Home goods e-commerce penetration rates will soar from 13% today, to 30%-plus over the next decade. And Wayfair — at the epicenter of this industry — will sustain huge revenue and profit growth.

Wayfair Stock to $600?

My numbers indicate that Wayfair stock could fly to $600-plus prices in the long run.

Here’s the math.

The home goods market in the U.S. sustains 3-4% compounded annual growth to hit $400+ million in sales by 2030. E-commerce penetration rates in that market rise from 13% today, to 35% by 2030. Home goods e-retail sales rise at a 13%-plus compounded annual pace to ~$150 billion. Wayfair, with roughly 20% market share today, leverages marketplace effects to expand to 35% market share by then.

Meanwhile, Wayfair simultaneously leans into international expansion to sustain equally huge growth in the international business.

Total revenues grow at a near 20% compounded annual growth rate to almost $70 billion by 2030.

Adjusted EBITDA margins expand towards the high-end of management’s long-term 8-10% target, thanks to economies of scale, favorable pricing trends and enhanced supply chain efficiencies.

Earnings per share wind up around $32 by 2030.

Based on a consumer discretionary sector-average 20x forward earnings multiple, that implies a 2029 price target for Wayfair stock of $640. Discounted back 8.5% per year, that equates to a 2020 price target for Wayfair stock of just over $300.

Bottom Line on W Stock

Thanks to Covid-19, Wayfair has clear visibility to turning into the Amazon of what will be a huge e-furniture market over the next 5 to 10 years.

Some of this upside is priced into Wayfair stock today.

But not all of it.

So I say stick with Wayfair stock. Buy on dips. Hold for the long haul. Or at least until the stock becomes overvalued.