Wayfair (W -20.09%) stock saw a nice bounce after the company reported another quarter of profitable growth. Revenue surged 49% year over year in the first quarter. But starting next quarter, Wayfair will be up against more difficult growth comparisons as revenue soared 84% last year in the early months of the pandemic. It will be very challenging to beat that performance in the current quarter.
Despite the expectation for lower growth in 2021, investors are feeling upbeat about Wayfair's prospects. During the first-quarter earnings call, CEO Niraj Shah made a bold prediction that the pandemic will fundamentally change the amount that consumers will spend online for home goods.
Here's why Shah is right and what it means for Wayfair's future.
Wayfair is serving the right market at the right time
Management disclosed on the earnings call that revenue was trending down in the high single digits in the second quarter to date, but that's expected. Investors care more about revenue stability in the near term, which would allow Wayfair to hold onto its tremendous market share gains from 2020. Investors don't want to see the company give back those gains as the economy reopens.
Fortunately, Shah doesn't see that happening. During the call, he said, "While demand for COVID-impacted categories like travel and entertainment is returning, we also believe the pandemic has fundamentally increased the share of wallet customers will spend on their homes in the future and the amount they will spend online."
Shah's prediction is based on internal trends management is seeing in the business. For example, Wayfair is seeing home spending remain higher than pre-pandemic levels even in areas where the economy has already reopened.
Most importantly, new customers are coming back. Wayfair said repeat customers placed 74.5% of the orders on the platform in the first quarter, up from 69.8% in the year-ago period. That figure certainly supports Shah's position that consumers are getting more comfortable shopping for home goods online.
Investors see a favorable backdrop for profitable growth
Analysts expect the favorable backdrop for home spending to lift all boats. Home Depot reported 20% revenue growth in fiscal 2020, and analysts forecast the home improvement retailer will post a sales increase of 3% in fiscal 2021.
However, analysts expect Wayfair to post revenue growth of over 12% this year with that figure accelerating to 20% in 2022. The forecast for continued demand makes sense, because the end of the pandemic will likely lead to more social gatherings hosted at home. That scenario can sustain demand for Wayfair's offerings.
Of course, the company also has an enormous tailwind as a pure-play e-commerce retailer. It ended the quarter with 33.2 million active customers, which represented an increase of 57% year over year. Since the majority of orders come from repeat customers, the growth in active customers sets up Wayfair for a reacceleration in revenue growth in 2022.
As the business scales, analysts expect Wayfair to grow adjusted earnings per share from $3.95 in 2021 to $6.23 in 2022. In a statement, Shah said that "our strong profitability should not only continue but expand," which supports the expectation for continued bottom-line growth.
In the long run, Wayfair's growing clout in e-commerce and improving earnings picture should send the stock price higher.