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Why Wayfair Stock Tumbled Today

By Jeremy Bowman – Sep 4, 2020 at 11:54AM

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An analyst downgrade helped push the stock down this morning.

What happened

Shares of Wayfair (W 1.13%) were heading lower today after the stock got dinged by an analyst downgrade and slid in tandem with the tech sell-off now in its second day. The online home furnishings seller had been one of the biggest winners on the market this year, so perhaps it's not surprising to see a pullback after the stock gained as much as 1,500% from its March bottom.

As of 10:51 a.m. EDT, the stock was down 14%.

A home office setup.

Image source: Getty Images.

So what

Bank of America lowered its rating on Wayfair from buy to neutral this morning partly on valuation concerns. Analyst Justin Post credited the company's execution and margin expansion, but believed the stock's expectations and valuation may have run up too high. He also noted that credit card data showed online spending on home furnishings slowed in August, as sales at brick-and-mortar stores recovered.

Today's slide comes after the stock gave up 8.2% yesterday on no news as tech stocks started to slip into a correction. The Nasdaq fell 5% yesterday, and was down as much as 5% on Friday morning. There was no specific news driving that movement, but investors seemed to believe the sector had become overinflated after the tech-focused index gained 82% since its March bottom.

Now what

There's no question that Wayfair's performance has boomed during the pandemic as millions of Americans had to rearrange their living spaces to adjust to life during the pandemic, turning to Wayfair to get things like home office furniture and children's playroom equipment, but that boom will eventually come to an end.

As investors look forward, the blistering 84% revenue growth that Wayfair delivered in the second quarter matters less, and its ability to sustain strong growth in a normalized environment takes precedence. While the company did turn in its first quarterly profit in the second quarter and was already targeting profitability by 2021, it will face a number of challenges as the crisis eases. After its skyrocketing gains and its elevated valuation, some caution is warranted.

Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Wayfair. The Motley Fool has a disclosure policy.

Stocks Mentioned

Wayfair Stock Quote
$42.10 (1.13%) $0.47

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