Very suddenly and somewhat unexpected, tech stocks fell off a cliff heading into Labor Day weekend. Wayfair (NYSE:W) stock was no exception to the trend. Rather, it was leading the sell-off, with W stock falling as much as 24% during the week.
Don’t stress this sell-off. It’s little more than a buying opportunity into Wayfair stock and other tech stocks.
The reality is that nothing is wrong with tech stocks besides the fact that they rallied too much. For months, these stocks could do no wrong. They kept pushing higher and higher and higher, to more and more extreme valuations. Eventually, gravity kicked in, and the result is a rapid sell-off in tech stocks to more reasonable valuation levels.
They’ll get to those more reasonable valuation levels. Soon. When they do, the sell-off will end, and the longer-term rally will resume, because the fundamentals underlying tech stocks remain as robust ever. That is, technology continues to disrupt every facet of our daily and professional lives, at an accelerated pace today because of Covid-19, and these companies’ influence, revenues and profits will only go way higher over the next 5 to 10 years.
This is especially true for Wayfair, a company that is defining a new era of online furniture shopping that will become the global norm in the 2020s.
It also helps that — thanks to the recent sell-off — Wayfair stock is now attractively undervalued.
So buy the September swoon in W stock.
Here’s a deeper look.
Wayfair is a Long-Term Winner
Thanks to Covid-19, Wayfair is a long-term winner positioned for huge growth over the next decade.
The story here is pretty simple.
Prior to Covid-19, consumers were selective about what they bought online.
In certain verticals where they felt the physical shopping experience didn’t offer them anything that they couldn’t get online — such as consumer electronics (43% digital sales penetration in 2019) and apparel (30% digital sales penetration) — consumers shopped online. In other verticals — like home goods (13% digital sales penetration) — consumers stuck to physical shopping because they felt that online compromised the shopping experience (you aren’t able to “see” and “feel” a new furniture piece, for example).
Covid-19, however, shut down physical stores, and forced everyone to shop online for everything.
When that happened, consumers realized that their preconceived notions about the shortcomings of online furniture shopping are antiquated. For example, Wayfair has developed robust AR technology so that consumers can now “see” a furniture piece in their home. Wayfair has a large reviews system, too, which allows shoppers to gauge how other consumers “feel” about the product.
In this sense, Covid-19 has forced consumers to realize that the online home goods shopping experience is just as robust as the physical one, but also way more convenient (you don’t have to leave your home, and thanks to built-out logistics, delivery can happen within days).
Wayfair is the best-in-breed e-commerce marketplace for home goods. They are the Amazon (NASDAQ:AMZN) of this space. And just as Amazon soared in the 2010s as broader consumer shopping migrated online, Wayfair will soar in the 2020s as specific home goods consumer shopping migrates online, too.
Wayfair Stock is Undervalued Now
Thanks to the recent plunge in tech stocks, W stock is now undervalued relative to the company’s long-term growth potential.
The home goods market in the U.S. will sustain historically normal 3-4% compounded annual growth to hit $400+ million in sales by 2030. E-commerce penetration rates in that market will rise from 13% today, to 35% by 2030. Home goods e-retail sales will consequently rise at a 13%-plus compounded annual pace to ~$150 billion. Wayfair, with roughly 20% market share today, will leverage marketplace effects and superior logistics to expand to 35% market share by then.
Meanwhile, Wayfair will simultaneously lean into international expansion to sustain equally huge growth in the international business.
Total revenues should grow at a near 20% compounded annual growth rate to almost $70 billion by 2030.
Adjusted EBITDA margins will 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 — all of which are showing up today thanks to increased scale.
Assuming all that, my modeling suggests that earnings per share will 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
Wayfair stock is a long-term winner.
The recent sell-off is just a healthy valuation gut check on a stock that had run up to extended levels.
I say buy the dip now that the stock is fundamentally undervalued again.
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 rated one of the world’s top stock pickers 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 hold a position in any of the aforementioned securities.