Wayfair Inc. Stock Drops on Earnings, but the Company Is Making the Right Long-Term Moves

Image source: Getty Images.

The sky is falling! The sky is falling!

Or, at least, if you're a shareholder of Wayfair (W 1.96%), that's what it feels like. The company's shares are down 19% Tuesday at 3 p.m. after reporting quarterly results that showed a much bigger loss than the company had last year, and more than Wall Street had been expecting.

But if you're a long-term investor, I think there was actually a lot to like in this report. And it's worth noting that all this loss does is put the stock back where it was just nine trading days ago -- when it began its run-up into earnings.

Let's start with the good news coming out of Wayfair

Wayfair continues to win over customers. The number of active users of the company's five home-furnishing websites totaled 6.67 million at the end of June, up a whopping 65% from the same time last year.

Revenue also continued to show considerable strength, growing 60% to $787 million. It's also worth noting that the company's direct retail segment -- which is the linchpin of the growth story and accounts for 96% of all revenue -- grew at an even faster pace: 72% year over year.

In virtually every key metric, Wayfair showed strength in its popularity with consumers.

Data source: Wayfair press release. 

Company CEO and co-founder Niraj Shah highlighted this strength with an impressive statistic: "Wayfair continues to take between a third and forty percent of the online dollar growth in our categories in the U.S."

So what's the problem at Wayfair?

Wall Street, however, has its concerns. Some are fair, while others seem simply shortsighted. Famed short-seller and head at Citron Research Andrew Left took to the airwaves following earnings, stating that he has a large short position in Wayfair.

"Wayfair is a nonsensical company and this shows you," Left reportedly said, adding that, "furniture is not meant to be sold like this. You'll lose to Amazon; you'll lose to Williams-Sonoma."

Left is correct in pointing out that Amazon especially is a rival that shouldn't be ignored. In fact, the biggest drawback to this week's earnings announcement was the fact that expenses were growing far faster than revenue. Take a look:

Data source: Wayfair press release. 

No category hurts the bottom line more over the short and medium terms than the 94% bump in operations spending. Unlike the advertising spend -- which clearly had an effect on the company's top line during the quarter -- the benefits of investing in the infrastructure necessary to improve customer service won't start showing until years down the line.

But Shah made clear that this is one of the company's key goals: "We are leveraging our expertise in technology and data across all areas of the business with a strategic focus on the expansion and optimization of our warehousing, transportation and logistics infrastructure [emphasis added]. As a result of these key initiatives, we are speeding up delivery times and reducing damage rates to make the retail experience for home more seamless and satisfying than ever before for our customers."

If that sounds familiar to you, it's because this type of thinking is how Jeff Bezos built Amazon into the behemoth that it is today. By spending gobs of money on fulfillment centers starting just after the Great Recession, Bezos scared away some investors. But those investments have clearly paid off, and provide a wide moat for Amazon's e-commerce business.

That does not, however, mean that Wayfair's success here is guaranteed. Amazon itself is a formidable opponent, and any hint that the company could be moving more aggressively into home furnishings should rightly scare investors.

But it's a huge stretch to say -- as Left did -- that Wayfair is nonsensical. Wayfair is simply taking a page right out of Amazon's book: forgoing profits now to grab market share and build an infrastructure that provides an immense long-term moat.

And as for Left's comment that "furniture is not meant to be sold like this," I have two things to say: First, large pieces of furniture only make up 25% of what Wayfair actually ships. The rest are more mundane things like towels, pillows, and other decorative items. Second, if furniture -- or whatever else -- really isn't meant to be sold like this, I'd like to hear how Wayfair's base of active customers has grown from 3.2 million active customers at the start of 2015 to 6.67 million today. That's a compounded growth rate of 63% per year.

If Wayfair ends up failing as a stock, it will be because of competition -- not because the business model is nonsensical or that it's selling things it wasn't meant to.