2020 has been a rough year for a lot of stocks. From the market peak in late February to the market trough in late March, the arrival of COVID-19 subtracted 35% from the value of the S&P 500. Few stocks were hit as hard as online furniture store Wayfair (W -3.67%), which lost more than twice as much as the S&P.
There's good news too, though. After falling 71% from February to March, Wayfair stock bounced in a big way on March 19, and it hasn't looked back since. Over the past couple of months, Wayfair shares returned an astounding 586% profit off of its lows.
Now it's time to sell, and collect those winnings.
Why sell a winner?
No doubt this will be a controversial opinion. After all, by all accounts, Wayfair is performing just swimmingly these days.
In reporting Wayfair's Q1 earnings earlier this month, CEO Niraj Shah summarized the quarter nicely when he observed that "millions of new shoppers have discovered Wayfair while they shelter in place at home." Buoyed by stay-at-home employees purchasing furniture to set up home offices, Wayfair sales surged 20% year-over-year in the face of a pandemic, and the company grew its "active customer" count 29%.
And yet, despite this sales success, Wayfair lost $3.04 per diluted share in the quarter. As sales grew 20%, Wayfair's losses grew twice as fast, rising 38% year over year.
Now granted, this situation could improve. Commenting on the quarter, Wayfair CFO Michael Fleisher predicted that "COVID-19 related changes ... will be much more impactful in Q2." His meaning: Wayfair will see revenue from shoppers, who placed orders late in Q1, only in Q2, when those orders are delivered and the revenue booked.
How big could this Q2 revenue bump become? Fleisher declined to give "specific guidance ranges," but did drop a heavy hint: "Quarter-to-date, our gross revenue growth year-over-year is trending at roughly 90%." Which is to say, if things proceed as they have begun, Q2 sales are looking like they could nearly double over Q2 2019 levels.
Still, the CFO cautioned that "we do not know how long these trends will persist."
What analysts say
After all, with states moving cautiously to begin reopening their economies this month, it's possible that before too much longer a lot of workers who were ordered to stay out of the office during the pandemic will soon be invited back. And even if that happens, how much more buying will "stay-at-home" workers need to be doing in future quarters? After all, there's only so many mid-back mesh task chairs (or standing desks) a home office needs. Once you've got it set up once, you're basically done.
Regardless, analysts are optimistic, forecasting 62% revenue growth for Wayfair in Q2 and 36% growth through the end of the year -- which sounds impressive.
But here's the thing: Even assuming that Q2 sales continue growing as they did through early May, and even assuming that Wayfair will hit analysts' sales targets for the full year, once 2020 is over sales growth post-pandemic is expected to settle back down into the mid-to-high teens, percentage-wise, over the next three years, according to estimates provided by S&P Global Market Intelligence.
And don't get me wrong -- those are great numbers. I'm just not sure they're great enough to justify paying seven times more for Wayfair stock today than what the stock cost two months ago. I especially don't think this is a good deal when you consider that analysts don't think even 62% sales growth will be enough to enable Wayfair to earn a profit this year. To the contrary, analysts forecast a $6.73 loss for the stock in 2020 -- followed by further losses in 2021, 2022, and 2023 as well.
Suffice it to say that for a stock that has never earned a profit before today, this forecast of continued losses in the boom year that is 2020 -- and over the next several years as well -- feels rather discouraging.
Selling furniture in a recession
Now admittedly, it's possible that the COVID-19 pandemic has changed how consumers feel about ordering furniture online in general. That's entirely possible, and it would be a boon to Wayfair's non-home-office business as well.
What worries me, though, is that with 36 million Americans now unemployed, and unemployment rates approaching 15%, now may not be the best time to be trying to sell consumers big-ticket discretionary furniture items -- online or off -- when those purchases aren't being reimbursed by employers.
Moreover, Fed Chairman Jerome Powell is warning that unemployment numbers could swell past the 25% level of unemployment last seen in the Great Depression. With America's economy heading full-tilt for recession, if not an actual depression, I don't think retail in general is going to be a great business to be in for the next several quarters at least.
Judging from the stock price, a lot of Wayfair investors haven't figured that out just yet. The time to sell the stock is before they do figure that out -- right here at Wayfair's post-run-up high.