E-commerce platforms have exploded since the pandemic locked the world down and sent consumers online. Wayfair (
W Quick Quote W - Free Report) , a leading digital platform for purchasing furniture and home décor, has been one such beneficiary of COVID-19 with an over 1,600% share price surge from its pandemic lows last March to its all-time high in mid-January 2021.
W is now traded over -50% off its November highs, and is currently valued at nearly 1/3
rd of the highs it reached last January.
It's time to pull out of this COVID winner, as society's online-driven home improvement binge decelerates.
Analysts have lowered their EPS estimates for the next couple of years, reining in their initial overzealous projections, pushing W into a Zacks Rank #5 (Strong Sell). Let me be clear here, I am not suggesting that you short sell this stock, but if you are a current stockholder, it may be a smart move to take pull your capital here for higher return potential elsewhere.
W has lost more than half its value in the volatility amid the volatility we’ve seen in the past 3 months, and it looks like this falling knife could go even lower as analysts continue to downgrade this equity and pull-down EPS estimates as its bottom-line slides back into negative territory in recent quarters with increasing depth.
The Business & My Concerns
Like what we’ve seen in the past 3 quarterly reports, prior to 2020, the company was experiencing continuously deeper bottom-line deficits the larger its sales grew (for 5 years), pointing to some systemic issues with the business's ability to scale.
2020 was Wayfair's golden year, and you can see this in both its financials and stock price. Its net income flipped from a deficit of $(982) million in 2019 to a robust profit of $242 million in 2020. My concern is that this profitability isn't sustainable in the post-pandemic world, which is progressive proving to be true as its profitable growth path reverted in 2021.
During the lockdown, people were spending way too much time in their homes, which catalyzed this desire to redecorate and engage in do-it-yourself (DIY) home projects. There has been a boom in spending on furniture and home goods, and Wayfair's ecommerce platform was perfectly positioned to capture this demand from quarantined customers.
The thing about furniture and housing décor is that many people want to see it in person before dropping a sizable amount of money on a new couch, patio furniture, etc. The argument can be made that customers have become conditioned to purchase things off Wayfair instead of going to their local furniture store. However, the fact of the matter is that even if this is true, people will still not be spending as much money on these items when the economy opens up. Consumers will be pivoting their budgets away from decorative pillows and towards things like travel and restaurants.
I am worried that this company will not be able to maintain its profitability in the post-pandemic world, and even if they do, it will not see the same growth rates that it saw amid the lockdowns.
W currently has 4 sell ratings on it, which is a red flag because sell ratings are not handed out nearly as often as buy/hold ratings (considering that the stock market, on average, always goes up). Wayfair is also sporting an over 210% debt-to-total capital ratio as it leverages its operations to the gills, pushing shareholders' equity deep into negative territory, another big red flag.
If the company is unable to regain its prior profitable growth outlay, it may be in real trouble. Again, I am not recommending that you short this stock. Just consider reallocating the capital to a more topical investment such as NVIDIA (
NVDA Quick Quote NVDA - Free Report) , my Bull Of The Day.