Wayfair (NYSE:W) stock has been on a tear, up 148% in the past year and 225% year-to-date. But its climb may not be over, as Wayfair stock does not look to be overextended.
For example, Wayfair now has a $28 billion market capitalization. That is equal to the market price times the number of shares outstanding. But Wayfair produced $279 million in net income in its latest quarter.
Therefore, on a run-rate basis, that works out to an annualized net income of $1.11 billion. That gives it a run-rate price-earnings ratio of just 25 times (i.e., $28 billion divided by $1.11 billion).
The bottom line is that people are buying the hell out of Wayfair’s products. And it is making a ton of money.
Strong FCF and EBITDA Results
Moreover, its free cash flow (FCF) was dramatically higher at $1.1 billion for the quarter. Again, on a run-rate basis, that works out to $4.4 billion annually. This represents a very high FCF yield of 15.7%.
In addition, Wayfair’s adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) margin on 10.2%. This is also very high.
By comparison, for example, Bed Bath and Beyond (NASDAQ:BBBY), another home furnishing company like Wayfair, lost money this past quarter.
Williams-Sonoma (NYSE:WSM), another omnichannel home furnishings competitor, has a $6.8 market cap. It made $128.7 million in FCF this past quarter. That works out to an annualized rate of $515 million and an FCF yield of 7.5%, again on a run-rate basis.
Therefore, Wayfair again is much cheaper than WSM stock, since its FCF yield is higher than WSM’s.
One reason for this could be that WSM’s EBITDA margin of 16% is much better than Wayfair’s 10.2% during this past quarter. In other words, Williams-Sonoma’s per sales profitability is higher than Wayfair, so it has a higher valuation.
Another competitor, ETSY (NASDAQ:ETSY) made $220.8 million in FCF this past quarter. It has a $14.1 billion market cap. So its run-rate FCF yield is $880.4 million divided by $14.1 billion, or 6.2%. That is over twice as expensive as Wayfair’s 15.7 % FCF yield.
But this may be explained by its high EBITDA margin – over 31% in the past quarter. That is three times better than Wayfair’s.
Nevertheless, my point stands. The Wayfair stock valuation is not unduly priced, even though it has risen a lot in the past year.
What Analysts Are Saying
Analysts are now saying that e-commerce takes up almost one-fifth of all consumer spending. A recent Bank of America analysis showed that online penetration is up to 19.1% of sales.
When the company’s earnings came out in early August at $3.13 per share for Q2, they “crushed” analysts’ estimates, as Barron’s pointed out. Analysts had been expecting just 83 cents per share.
Barron’s seemed skeptical. The CEO, Niraj Shah, said its surging sales shows the “inherent structural profitability” of its business. The Barron’s author said the “inherent question” is whether surging internet sales can be sustained.
For example, Wayfair did not give any guidance for the coming quarter or the year. Analysts seem to have marked down their earnings per share estimates for next year. Their answer to the question of whether online sales will be sustained is no, there will be a pause next year.
However, I think human nature and habits get ingrained. If you had a good experience buying furniture online with Wayfair, why would you go back to buying similar purchases in a store? After all, it gets delivered to you more or less for free and you don’t have to hassle with loading and unloading it out of your car.
Analysts may yet be surprised again.
What to Do With Wayfair Stock
Even if the surge in sales and profitability is not completely sustainable, I have shown that the stock’s valuation is not completely out of whack with its competitors.
It might be worthwhile to see how things fare over the next two quarters whether the company’s higher margins can be sustained. Moreover, there is room for the FCF yield to improve to be closer to its peers.
Therefore, investors might be inclined, if they were looking to take a position in Wayfair stock, to look for a dip in the price. For example, this could occur if the next results do not completely surprise analysts like they did this last time.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Mark Hake runs the Total Yield Value Guide which you can review here.
