Wayfair (W 4.45%) has had a phenomenal run in 2020 -- shares are up nearly 170% as the online furniture retailer has leaned into demand during the COVID-19 pandemic. Could this e-commerce upstart provide investors with further gains in the coming quarters? Joined by co-host Brian Feroldi, Motley Fool contributor Asit Sharma breaks down important parts of the bull-case investment thesis on Wayfair in the video below.
A full transcript follows the video.
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Sharma: I said at the beginning of this hour that this was one of the few that I had a big losing position in [Motley Fool CAPS] and I removed it because the financials looked so bad. I should say, after I did that, the stock has done pretty well. If you're a shareholder, let's make the counter-argument, OK? So, there is a counter-argument here, and that is sales going from $4.2 billion in 2017, up all the way past $9 billion today. What is that, besides a really great rate of growth in revenue? That is the capture of market share, as purchasing furniture goes from traditional walking in, talking to a sales person, walking around a huge sales floor, looking at 20 different couch models or tables, making a selection and figuring out how to get it home. That's all changing so rapidly.
And the COVID-19 pandemic has only exacerbated this movement, I think, and what they're doing, Brian talked about investing in hypergrowth. The hardest part of this model, isn't really the distribution. So, distribution covers from the supplier to a regional warehouse. It's the middle mile and last mile, it's getting that product from a city which may be 100 miles from you, to your door. And this is the really expensive part of the company's growth, but you see how they're capturing the market, they've already got $9 billion of this market. The bull case is that, you know what? They're going to be EBITDA positive. Next quarter, they're going to have a positive adjusted EBITDA margin, not even EBITDA, actually it's only adjusted EBITDA, let's give them some points for that.
At some point in time, they will have completed, let's say 70% of these investments and you'll start to see margins growing. We also have to point out that the company has really grown, just here in North America; it's grown in Canada, it's grown in the US. Where's it placing its bets now? Not in Asia or Latin America, but in another developed economy, which has the potential among consumers to absorb a big-ticket business model like this, which is Europe. The company is really heavily into Germany, it's extending around into the wealthier European nations. So, that's another part of the bull case that we shouldn't ignore.
There is a growth ramp here for Wayfair to keep building this really nice double-digit sales growth rate. So, maybe on the cusp of a big change here, Brian, I don't know how probable it is, but there's a possibility we could come back and do this deep dive in two years and say, wow, these financials have improved. And the investments have slowed down. Money is starting to drop to the bottom line. And now, this is a $15 billion company. I'm not saying that it's going to grow that rate, but there is definitely a case.