All year long, Wayfair (NYSE:W) stock has been a beacon of strength in a struggling market, as the company has actually benefitted from the Covid-19 crisis since physical retail stores are closed and consumers have been forced to shop for furniture and home décor online. Heading into September, Wayfair stock was up 240% year-to-date.
Then, everything got flipped on its head.
Pfizer (NYSE:PFE), Moderna (NASDAQ:MRNA), and AstraZeneca (NYSE:AZN) all announced — one after the other — that their Covid-19 vaccines were all proving to be 90% or more effective in preventing infection under certain scenarios. Together, these announcements make it crystal clear that we are indeed in the final stages of the Covid-19 crisis.
Big win for the stock market. Big win for the economy. And big win for humanity. But a big loss for Wayfair stock.
On fears that Covid-19 going away and the physical economy reopening in 2021 will reduce traffic to Wayfair.com, Wayfair stock has shed about 30% since August.
This selloff is unnecessarily short-sighted.
Long-term, the home decor retail market will pivot largely online, and Wayfair is the Amazon (NASDAQ:AMZN) of this space. So buy the dip in Wayfair stock for huge long-term gains.
Here’s a deeper look.
The Future of Home Retail Is Online
All of these fears about the end of Covid-19 marking the end of the shift to buying furniture online are significantly overstated.
In fact, they are dead wrong.
Covid-19 was the impetus for a permanent acceleration in home retail sales moving online, and for this retail vertical to be largely digitized over the next decade.
Here’s the story.
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 on a website, 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 have been made antiquated by significant technological advancements in the past few years.
A Permanent Covid-19 Shift
For example, Wayfair has developed robust AR (augmented reality) technology so that consumers can now “see” a furniture piece in their home. Wayfair has also created a large reviews system, too, which allows shoppers to gauge how other consumers “feel” about the product.
So, the whole “seeing” and “feeling” advantages of physical furniture shopping are overstated.
Meanwhile, Wayfair leverages data-driven algorithms to curate a feed of relevant products for consumers (something physical retailers cannot dynamically do). Plus, Wayfair has fleshed out its logistics so that furniture pieces ordered online can arrive to your doorstep within days (if not sooner).
And, of course, Wayfair allows you to do all of that by just sitting at home and clicking a few things on your phone or computer.
In other words, online home retail shopping today is far more convenient than physical retail shopping, while also just as robust in terms of product selection, shopping process, delivery times, etc.
All the obstacles of online home retail have been removed– and consumers are aware of that, thanks to Covid-19.
That sets the stage for the online home retail space to follow in the footsteps of the online consumer electronics and online apparel categories, and rapidly digitize over the next several years.
Wayfair stock is at the epicenter of this secular digitization.
Wayfair Is the Amazon of Home Retail
Long-term, Wayfair projects as the Amazon of a fairly large online home retail segment.
This pretty much all boils down to one thing: marketplace effects.
Wayfair has leveraged first mover’s advantage in online home retail to turn into the largest player in the space by a mile. This means Wayfair has more buyers and sellers in its marketplace that any other platform online.
That’s big, because as the marketplace with the most buyers, Wayfair will attract more sellers (since sellers are looking for buyers). Those new sellers will bring in new buyers (since they increase product inventory, and consumers want more options). Therefore, more buyers, leads to more sellers, which lead to more buyers.
Lather. Rinse. Repeat.
It’s a positive growth flywheel called “marketplace effects” — and it will ultimately allow Wayfair to sustain leadership position in the burgeoning online home retail market for the foreseeable future.
Assuming so, then Wayfair stock appears undervalued today.
Wayfair Stock Is Undervalued
Following the recent pullback, Wayfair stock is now attractively undervalued. This is an attractive entry point for long-term investors.
Here’s the model.
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 going through some near-term weakness.
Normally, that’s a recipe for a buying opportunity. This time is no different.
Recent weakness in Wayfair stock is little more than an opportunity to a buy long-term winner at an attractive price.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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