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Wayfair Stock: Buy the Dip?

By Demitri Kalogeropoulos – Sep 13, 2020 at 10:00AM

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It's an attractive investment, but expect volatility ahead.

Wayfair (W -5.82%) stock has dropped over 20% from its late August high. The slump wasn't fueled by any official news from the e-commerce specialist. Instead, investors pulled shares lower as part of the wider tech sell-off. There are also rising concerns that Wayfair's short-term growth might not live up to expectations.

But taking advantage of the decline might set investors up for bigger gains down the road -- if you believe in the bullish outlook for this business. Let's take a closer look at why you might want to capitalize on Wayfair's latest pullback.

Great engagement

Wayfair has had about the best first half to fiscal 2020 that shareholders could have hoped for. A pandemic-related shift toward e-commerce spending, especially in home furnishings, has helped it add $2.3 billion, or 53%, to its sales in six months. That result includes the dramatic 84% surge in revenue in the fiscal second quarter. 

A young woman sitting on a couch with a laptop in her lap and holding a credit card in her left hand

Image source: Getty Images.

Other key growth metrics are pointing in the right direction. Wayfair is building a huge base of highly engaged customers who buy a range of furnishings and home improvement supplies from its platform. That stickiness means a significant chunk of the 5 million users it has added will likely be making steady purchases into 2021 and beyond.

Better finances

The other main reason to like this stock is that Wayfair is (finally) generating profits. Following several years of losses, operating margin last quarter crossed 10% of sales. Sure, some of that spike is due to the temporary sales surge that came from COVID-19 store shutdowns in the spring and early summer months.

But CEO Niraj Shah and his team were on track to push the business into the black before the pandemic struck, and they plan to protect that newly established profitability going forward.

Beating the bear case

The pessimistic case for Wayfair shares boils down to the business failing to live up to Wall Street's high expectations. There's no denying that the stock is priced for strong growth ahead. Shares are up almost 200% so far in 2020 even after the recent 25% decline. That level of optimism helps explain why the stock tumbled in early September after just a hint of reduced Wall Street expectations.

That's a good reminder that Wayfair isn't the right pick for volatility-averse investors. Shares are likely to drop further than the market during downturns, like most growth stocks.

However, the company in the past few years was succeeding in building a formidable online business and global brand. That platform was winning share away from rivals like Overstock, Walmart, and Home Depot before the pandemic struck and has only added to its lead since then. Now that the biggest weakness to that investment thesis -- its lack of profitability -- appears to be gone, Wayfair looks like an even better long-term bet.

It's possible that shares will drop further through late 2020 to give investors an even better entry point. But you shouldn't let fear of volatility alone scare you away from Wayfair today. It has a good shot at achieving a huge, profitable global retailing base over the next few years.

Demitri Kalogeropoulos owns shares of Home Depot. The Motley Fool owns shares of and recommends Home Depot and Wayfair. The Motley Fool has a disclosure policy.

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Wayfair Inc. Stock Quote
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W
$32.55 (-5.82%) $-2.01

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