Wayfair (W -1.31%), the fast-growing but still-unprofitable online home furnishings retailer, is already trouncing the market in 2019. But at least one Wall Street pro believes the stock has more room to run.
An analyst at Jefferies just started covering the company with a "buy" rating while predicting shares could rise to over $190 each, equating to an additional 30% gain for investors from here.
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The bulls are in charge
It's not hard to see why the bulls are in charge of Wayfair's stock trends these days. The company achieved some head-turning market share wins in 2018, after all, including adding more than $2 billion to its sales base compared to a $1.3 billion increase in the prior year.
Wayfair followed up that blockbuster performance with a solid start to fiscal 2019. Sales increased 39% in the core U.S. market during Q1 to yet again outpace management's targets. The e-commerce specialist's base of active customers has now crossed 16 million compared to less than 9 million just two years earlier.
Yet arguably the better news for investors, and the one that Jefferies zeroed in on to support that "buy" rating, is Wayfair's international opportunity. CEO Niraj Shah and his team believe Canada, the U.K., and Germany mimic the U.S. in how the home furnishings market is fractured and ripe for online disruption. Wayfair is aiming to use its recent experience at home and its growing market and brand clout to attack these countries that together represent around 50% of the addressable market in the U.S.
Major concerns
However, a Wayfair purchase isn't a slam-dunk investment case. The company hasn't earned a profit in any of the last five years, and losses have been ballooning at an increasing pace recently.
Wayfair is adding thousands of employees in areas like supply chain logistics, website development, and fulfillment as it expands into new geographies, fashions its own proprietary delivery network, and targets new product niches. While management has plenty of data suggesting these moves will pay off over time, the most immediate impact to date has been gushing red ink.
Executives are targeting adjusted profitability of between 8% and 10% of sales, but that figure worsened to a 5% loss in the most recent quarter, compared to a 3% decline in 2018 and a 1% downtick in 2017. That negative trend suggests it could be some time before investors start seeing Wayfair produce sustainable earnings.
What to watch
If you're OK with waiting for a profit rebound while sales rise, then the key metric to watch in 2019 is operating margin. That figure incorporates two critical trends that investors will want to follow to judge the strength of Wayfair's business.
The first is advertising spending, which effectively describes how much money the company is paying to attract customers. That rate ticked down to 11% of sales last year from 12%, despite surging competition, but Wayfair is aiming for it to drop closer to 7% over time. The other is gross profit margin, which currently sits at a healthy 25% of sales. A sustained deterioration in either of these figures would imply share gains by rivals like Overstock.
So far, though, Wayfair's increasing losses are being driven by its business investments, and that means they are mostly within management's control. Once the retailer finishes building out its infrastructure to serve perhaps 8 or 10 million additional active customers, then its earnings profile would easily generate substantial profits. That long-term success will be the ultimate factor in determining whether Wayfair's stock keeps rallying from here.
