Shares of eyeglass vendor Warby Parker (NASDAQ:WRBY) exploded out of the gate on Sept. 29, rising 36% to end the day at $54.49. WRBY stock fell only 29 cents per share overnight.
The market cap on Sept. 30 was over $4.2 billion. Not bad for a company that had $384 million in revenue for all of 2020 and $270.5 million for the first half of 2021, losing $1.43 per share during those 18 months.
The lessons here go far beyond Warby Parker, which donates glasses when customers buy new ones. The market still has a huge appetite for growth over value, and a preference for novel business models.
The Warby Parker Story
Warby Parker was founded in 2010 as JAND. It took its name from partners Jeffrey Raider, Andrew Hunt, Neil Blumenthal and David Gilboa. The trade name is based on characters in a Jack Kerouac journal. It was profiled in Vogue very soon after its launch with $2,500 in seed capital.
The initial model was online only, with customers sent up to five frames. The first stores were opened in 2013. The company also has pop-up shops at Nordstrom (NYSE:JWN) outlets.
Before the public offering, Warby Parker did a private placement of 2 million shares at $24.53. Those who got in wake have a paper profit over 100%.
Warby Parker is a direct listing. Some of those shareholders are the people selling you stock, not the company itself. Warby Parker wasn’t raising money in the IPO.
It’s the same process used by Roblox (NASDAQ:RBLX) in March. While volatile, Roblox now trades close to where it first traded. Spotify (NASDAQ:SPOT) also went public in a direct listing. So far in 2021, six companies have taken this route.
WRBY Stock Prospects
Like many companies that began online, such as Casper Sleep (NASDAQ:CSPR), Warby Parker is relying heavily on physical stores to power its growth. It now has 140 outlets.
By opening stores right after opening online, direct to consumer brands capitalize on customer goodwill. It means that when stores open, customers are already familiar with the brand. It also means there’s less risk in opening a lot of stores quickly.
While the model generates top line growth, profits can be elusive. Casper stock is down nearly 60% since its public offering in February 2020. In the S-1, Warby Parker management said its retail stores were very productive, with $2,900 of sales per square foot of space. Stores now represent 40% of net revenue.
Companies that once opened in shopping malls, then went into e-commerce, are now reversing the process. It’s a reminder that there is no longer such a thing as e-commerce. It’s all just commerce. Building a brand online, then seeking to fulfill that brand promise in the real world, makes more sense than doing it the other way around.
The Bottom Line
I wouldn’t touch Warby Parker stock at the current price. You’re looking at 50% growth, but no profits, paying over 10x revenue for what’s essentially a chain of eyeglass stores.
Warby Parker could continue to grow by adding optometrists to more outlets, and by expanding into other eye products or even hearing. The question is whether it will turn a profit, given the costs of opening stores that drive growth.
Most retailers sell at a discount to sales. Even Target (NYSE:TGT) has a market cap 15% lower than last year’s revenue, and Costco Wholesale (NASDAQ:COST) sells at only a small premium. Retail margins are thin.
Once the market realizes this, air is going to come out of the Warby Parker balloon. Investors, or acquirers, may find the discount price attractive. I’ll wait.
On the date of publication, Dana Blankenhorn held no positions in companies mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Living With Moore’s Law: Past, Present and Future available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.
