In this clip from Market Foolery, the team covers the latest news from furniture e-commerce player Wayfair (NYSE:W). The company operates with a customer-centric model that has helped it post strong revenue, but how is the business trending? And what will it take for Wayfair to achieve profitability?
A full transcript follows the video.
This video was recorded on May 9, 2017.
Chris Hill: We'll start with Wayfair, the online furniture retailer. Wayfair's first-quarter loss was smaller than expected, and Wall Street is apparently throwing them a parade, because the stock is up 22%. How good was this quarter?
Jason Moser: Imagine if they were even more unprofitable! No, I kid.
Hill: [laughs] I mean, to cut Wayfair a little slack, their sales numbers looked good. Their revenue number, I think, is a big part of what's driving the stock today, because it wasn't just a smaller loss, it was like, "You guys are actually putting up bigger sales than we thought you were going to put up."
Moser: Yeah. Wayfair has been a fascinating company to cover. I've covered it since its IPO. We had it on the watch list in MDP for a time, removed it just because we felt like it was a bit smaller, a bit of a riskier play than what we were looking for in our portfolio. Someone asked me at some point in the past week or so on Twitter about Amazon starting to dip a toe into this line, moving into more home furnishing and home goods and things like that, and was that going to be the death blow for Wayfair? To me, that's that old, what's going to be the Wayfair killer? What's going to be the Netflix killer? Any time you start talking about that, I think you have to take a step back and realize, first and foremost, that ultimately validates the opportunity that Wayfair has been seeing and has built this business on, so there's something to that. To your point, they do continue to grow sales at a nice clip, so that means they're doing something right. I think part of that is the fact that it's a company very much built on being extremely customer-centric. I think when you have leaders who are building their businesses based on giving their customers what they want, whether it'd be value, quick delivery, whatever it is, those are generally very powerful businesses over time.
Now, I think that with Wayfair, the metric that I always continue to pay the closest attention to is looking at the percentage of orders placed by repeat customers. Ultimately, what Wayfair is going to have to do to become profitable is, they're going to have to really ratchet back the spending on ad spend, marketing, and whatnot, those customer acquisition costs can be very expensive up front. So, they want to acquire customers and then keep those customers. That was a metric that really came through this quarter. It was 60.4% of orders placed by repeat customers this quarter, versus 55.4% a year ago. That is a trend that's going in the right direction. A trend that maybe isn't going in the right direction, operating expenses were higher this quarter than they were a year ago. So, the big question mark for Wayfair is, when they start pulling back on that spending, are they going to be able to maintain that growth? I think that's a fair question. I haven't necessarily come up with the answer yet. I think they're doing a lot of things right.
The reaction today is a bit surprising, because the business is still unprofitable. So, I think it would probably behoove them to focus on trying to get profitable as quickly as possible. I feel like we're at this point in the market where the market is paying up for all sorts of growth, whether it's Tesla or Zillow or Wayfair -- it's not about profits, it's just about the promise. At some point, that worm is going to turn, so it's going to be in their best interest to try to at least get this business as profitable as they can as soon as they can so that they can at least tell that side of the story. I think it's a good business. Having just moved ourselves, I've seen one or two Wayfair boxes on our doorstep as well. But all in all, most of the metrics are all trending in the right direction. They're bringing in more active customers, they're hanging on to those customers, those customers tend to buy more over time, they become very valuable over lifetime. It remains to be seen exactly how important this move Amazon makes is. Time will only tell that one. But all in all, good quarter for Wayfair.
Chris Hill owns shares of Amazon. Jason Moser owns shares of Twitter. The Motley Fool owns shares of and recommends Amazon, Netflix, Tesla, Twitter, Wayfair, Zillow Group (A shares), and Zillow Group (C shares). The Motley Fool has a disclosure policy.