Wayfair (NYSE:W) stock suddenly is one of the best stocks of 2020. Shares have nearly doubled. Among more than 600 stocks with a market capitalization over $10 billion, Wayfair stock now has the fifth-best year-to-date returns.
It’s been quite a ride to get to this point. Coming into the year, W stock had fallen nearly 50% from March 2019 highs. An early-year rally then reversed after a disappointing fourth quarter report at the end of February.
It would get worse — much worse. The coronavirus pandemic would send U.S. stocks plunging. Amid a “flight to safety,” Wayfair stock collapsed. By March 19, shares were down 74% in 2020, and off about 85% from early 2019 highs.
From there, however, W has posted an enormous run. In seven weeks, the stock has gained over 700%. A first quarter beat this week alone added about $3 billion in market value.
That one-day gain, incredibly, is greater than the company’s entire market value at March lows.
Even in a market that is the most volatile in my 20-plus years of investing, Wayfair stock stands out. Going forward, that volatility will be somewhat moderate.
But for both technical and fundamental reasons, the stock is going to stay a roller-coaster. Investors picking a side need to have conviction in their thesis and need to be ready to bail if and when the trade goes wrong.
Choosing a Side
The wild trading in Wayfair so far this year unquestionably has been amplified by the huge swings in the broader market. But even as we return to normalcy, volatility in W stock likely will stay elevated for several reasons.
The first is that Wayfair itself makes it somewhat easy to firmly choose a side. To some investors, Wayfair stock is an obvious bubble. After this rally, Wayfair now has a market capitalization around $17 billion. But the business isn’t profitable. In fact, it’s not even close.
In 2019, Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was negative $497 million — over 5% of revenue. In the first quarter alone — whose results added $3 billion to Wayfair’s market capitalization — the company burned over $350 million in cash. EBITDA remained sharply negative.
Yes, revenue is growing sharply. But to bears, Wayfair is the epitome of a broader bubble in growth stocks. Investors are focusing on an increasing top line. They’re ignoring the fact that the company is selling dollar bills for 95 cents.
To bulls, meanwhile, the stock might seem like a slam dunk. Near-term losses are steep, but required to build the long-term opportunity. And that opportunity is huge. If the company dominates online furniture retail as hoped, its growth will last for decades, and its profit margins eventually will be significant.
To bears, the rising stock price is the sign of a bubble. To bulls, that price reflects the market’s growing realization of the long-term opportunity — and the mid-term boost to demand created by a consumer base largely stuck at home.
The Story Sounds Familiar
To be sure, similar stories have played out for years in this market. Skeptics have been questioning the valuation of Amazon.com (NASDAQ:AMZN) since before the financial crisis. Bears spent years pointing to the lack of profitability at Tesla (NASDAQ:TSLA).
Dozens of other names have seen similar “growth versus value” arguments.
Wayfair bulls can argue — correctly — that the optimists almost always have won. If a company establishes its leadership in a growing market, its stock gains. AMZN and TSLA are prime examples.
Shopify (NYSE:SHOP) is another: that stock, too, has seen a massive rally of late, and like W rallied this week after strong earnings. Zoom Video Communications (NASDAQ:ZM) shows what happens when a broader growth story gets a coronavirus boost.
Investors who avoided those stories have missed out on big gains. Those that shorted them have taken a big hit.
The Huge Rally in Wayfair Stock
Of course, it’s not as if W stock is at the lows. Again, the stock is up over 700% in less than two months.
It’s a staggering rally, even if Q1 results were strong. And it’s certainly possible, if not likely, that a short squeeze contributed. The most recent data suggests that 36% of the float is sold short. Some of those traders no doubt covered into and out of earnings, adding fuel to the proverbial fire.
That’s not necessarily a good thing. Short squeezes are trading phenomena. They’re not pillars of long-term investment cases. It’s certainly possible that, at least in the short term, Wayfair stock has run a bit too far.
And while the bears have been spectacularly wrong for the last few weeks, there are some reasons for at least caution. Wayfair remains significantly unprofitable. Owing to the nature of the operating model, some customers making a purchase in April might not return for years.
There’s still a lot of work left to do for Wayfair. There are still many different ways for this story to play out. But investors can be almost certain of one key fact: the roller-coaster ride in Wayfair stock is going to keep going.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.