Home decor e-commerce company Wayfair (NYSE:W) is in the financial headlines because of the highly publicized two-day Way Day sale. However, Way Day isn’t the only reason that financial commentators are discussing Wayfair stock.
The company is also in the headlines because a couple of noteworthy analysts have issued less-than-stellar opinions on Wayfair stock. In fact, one analyst set the stock’s fair value at less than half of the current share price.
This is interesting because, as I reported previously, Wayfair had a blockbuster second quarter. Besides, e-commerce is a hot sector in 2020. Shouldn’t all of the analysts be super-bullish on Wayfair stock, then?
If some experts are lukewarm on Wayfair stock, then perhaps there are valid reasons for this. And if that’s the case, then a dose of skepticism could be valuable for overeager Wayfair bulls.
A Closer Look at Wayfair Stock
One thing that bothers me about Wayfair stock is its trailing 12-months earnings per share, which is -$6.56. That’s not horrendous for a stock that’s nearly $300, but it’s still a red flag because it’s negative.
There’s also a concern regarding the valuation of Wayfair stock. Its 52-week range is $21.70 to $349.08. That’s a massive move in a year’s time. And, the Wayfair share price is much closer to the high than the low.
Granted, e-commerce stocks in 2020 are generally expensive. You’re just not going to see bargains in this sector like you would with, say, energy stocks.
With all of that being said, it’s still worrisome that Wayfair stock is so pricey while the historical earnings per share is a negative number. This raises the issue of sustainability in regard to the trajectory of this high-flying stock.
The Good, the Bad and the Ugly
So, I’ll start with a recap of the good news. During the second quarter of 2020, Wayfair recorded 18.9 million orders delivered, representing a 106.2% increase. Moreover, the company reported $4.30 billion in quarterly revenues, signifying an 83.7% increase.
Furthermore, 5 million new customers were added during this quarter. Therefore, Wayfair CEO Niraj Shah had every reason to conclude, “The second quarter was a very strong period for Wayfair.”
Now for the bad news. Bank of America analyst Ryan Gee recently downgraded Wayfair stock from “buy” to “neutral.” Justin Post, another Bank of America analyst, concurred with Gee’s downgrade and assessed a price target $330 on Wayfair shares.
Gee cited Wayfair stock’s high valuation, noting that its price-to-sales ratio is almost at a five-year high. In addition, Gee seemed to be concerned about Wayfair’s ability to compete next year, saying, “tough comparisons loom in 2021.”
And here’s where it gets ugly. Morningstar analyst Jaime Katz forecast that “competitors will continue to attempt faster delivery” than Wayfair, “spurring increasing competition.” With that, Katz set Wayfair stock’s fair value at $87, well below half of the current share price. Ouch!
Way Day, or Mayday?
Over-reliance on a single event isn’t a great strategy for any e-commerce platform. Judging from the way Way Day is promoted, it just feels like Wayfair puts too much emphasis on this two-day sale.
We don’t have the sales or revenue stats yet on Way Day 2020, which took place on Sept. 23 and 24. To underscore the importance of this event, Wayfair shouted to anyone who would listen, “It’s time for Way Day, the biggest and best Wayfair sale of the year!” and “Way Day is more than a promotion, it’s the biggest Wayfair sale of 2020.”
I expect that this year’s Way Day won’t be able to keep up the blistering pace of Way Day 2019. Indeed, last year’s event resulted in 325% greater revenues than those generated by Wayfair over the 28 days leading up to Way Day.
Expecting a repeat of that performance is probably asking for too much. Thus, investors with sky-high expectations might be disappointed with Way Day 2020.
The Bottom Line
A high valuation, the ability to compete next year and the potential disappointment in this year’s Way Day are all major concerns for Wayfair stock holders.
The analysts aren’t always right, but if their issues with Wayfair stock are spot-on, then it’s probably time for investors to exercise due caution.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.