On this Market Foolery segment, host Chris Hill is joined by Million Dollar Portfolio's Jason Moser as they attempt to reason out why the market got spooked by Wayfair's (NYSE:W) second-quarter report. It beat expectations, is growing revenue at a rapid clip, and continues to operate in the same way that inspired its shares to move upward by more than 100% through 2017.
A full transcript follows the podcast.
This podcast was recorded on Aug. 8, 2017.
Chris Hill: Let's start with online furniture, and that of course means Wayfair. Wayfair taking a little bit of a hit today. Stock down around 8%. But, help me understand this, they had a loss for the second quarter, but it was smaller than people were expecting. Their revenue grew nearly 50% from a year ago. This is a stock that's had a great 2017, even with the drop today. I'm not sure why people are selling this stock, because Wayfair is doing what Wayfair has done for a while now.
Jason Moser: Yeah, and they continue to do what they tell us they're going to do. As you know, I'm always a big fan of that. The story with Wayfair is pretty simple. It's a matter of how much slack the market is going to give this company as they continue to grow. It's a good business, it's not a profitable business yet, so that's the near-term concern there. But there are signs, certainly, that at least in the near term, all of these investments that they're making in the business are working. So, to your question as to why the market might be selling the stock today, I think it's a combination of two things. No. 1 is, they had a very good year thus far. Whenever you have these businesses that aren't profitable yet, you have to judge their valuation a bit more subjectively. Valuation is an art in and of itself anyway. Probably, the bigger concern is that they are forecasting some modest profitability headwinds in the back half of the year as they continue to build out this business, particularly on the international front. But, all in all, the metrics are still pointing in the right direction for these guys. They're doing a good job.
Hill: The stock is up -- even with the drop today -- more than 100%, I think it's around a 110% gain for 2017. How are they doing in terms of their spending? Because that has been, at various points of the last couple years with Wayfair, you could look at their marketing spend and you could either be pretty happy with how it was going, or you could look at it and almost wince a little bit like, boy, they're spending a lot.
Moser: They are spending a lot. If you watch your linear TV at all, or you have Hulu or a skinny bundle, you'll see Wayfair is still out there a good bit. It needs to be that way for right now. When you look at the company's margins, encouraging for the quarter was, gross margin held steady from the quarter a year ago at 24%. That's important because their gross margin includes all of that spending on fulfillment and shipping, which is obviously the major expense for this company, is getting that stuff from point A to point B. Sort of the thesis behind this investment, behind the idea, at least, is that at some point, they're going to pull back on that customer acquisition and marketing spend and unlock some more profitability in the business as they grow their footprint, as they grow that distribution network. It seems like it's working. We talked about all of these metrics pointing in the right direction.
The big metric that I always look at first and foremost is the percentage of orders from repeat customers. All that tells us is, the more customers they're able to acquire and keep in and retain, that means those customers become more profitable over time, because they don't have to pay those high acquisition costs of getting new customers. So, a year ago, that number was 57.6%. This quarter, it was 61.3%. So, that number is higher. That's good. That means they have more repeat customers coming back to order more things.
Again, it's a matter of how long the market is going to let this thing play out. If we ran into a hiccup here with a correction or any kind of recession, this is the kind of business that would probably feel a pretty good pinch from that because of the fact that it's still in growth mode, investing so much, not really demonstrating material sustainable profitability yet. That's only a matter of time. Again, the management team keeps on doing what they say they're going to do. And having just moved here a few months ago, I've seen a lot of Wayfair boxes on my front porch, Chris, so we're doing our part to keep these guys moving in the right direction.
Hill: You're welcome, Wayfair shareholders.