Shares of Wayfair (W -3.72%) are down over 60% after reaching an all-time high of $355.96 in March 2021. Revenue fell 3% last year, coming off a spike in demand in 2020. The deceleration in growth caused the stock to spiral downward as investors reset their growth expectations.
While revenue fell again in the fourth quarter, the stock is up 10% since the release of the fourth-quarter report. Is Wayfair a good investment at these price levels?
A look at Wayfair's valuation
Relative to its annual revenue, the stock is as cheap as it's ever been since Wayfair's initial public offering in 2014. Revenue grew 35% in 2019 but then accelerated to a rate of 55% in 2020. During the pandemic boom, the market sent the stock soaring to a price-to-sales (P/S) ratio of nearly 3.0 as investors extrapolated the elevated growth further out in the future. But after the sell-off, shares now trade at a P/S multiple of 1.1, which is at the low end of its past trading range.
Another valuation metric paints a similar picture of the stock's value. Looking at the stock price relative to cash from operations per share, Wayfair is currently trading lower than Amazon but more expensive than Costco Wholesale, which makes sense given that Wayfair has grown faster than the discount warehouse store historically. At these levels, Wayfair appears to offer good value, which explains why the stock might be rising following its latest earnings results.
Data by YCharts.
Despite the deceleration in growth last year, it's important for investors to focus on the long-term opportunity in front of Wayfair. The home goods market is worth $800 billion with Wayfair already showing progress in capturing a sizable share of this opportunity. Wayfair reported $13.7 billion in revenue for 2021, up 50% from 2019.
Like Amazon, Wayfair is winning over consumers with its massive selection, fast delivery, and easy-to-browse marketplace. The home goods seller added 11 million products to its inventory last year. A large selection is vital to driving sales in the home goods business, since customers typically look at several items before deciding on the right fit for their home.
Image source: Getty Images.
Wayfair's competitive advantage
The key to offering a wide selection is Wayfair's extensive list of suppliers. It reported having more than 23,000 suppliers last year. That is nearly double the 12,000 it reported in the fourth quarter of 2019. A growing supplier base reflects Wayfair's strengthening brand in this competitive industry.
With ocean freight costs skyrocketing in 2021, suppliers took advantage of Wayfair's digital freight forwarding service using its CastleGate logistics network. This made Wayfair a top-20 importer in the U.S. by volume, according to the company, and management expects to double its forwarding volume this year.
Wayfair's CastleGate supply network is a key competitive advantage. As CEO Niraj Shah explained on the recent earnings call, "Participating suppliers will win, because the cost and speed advantages translate into lower retail prices and conversion gains."
As Shah mentioned, the ultimate benefit of investing in its own supply chain network is lower retail prices for customers. This positions Wayfair to gain market share, expand its loyal customers base, and continue adding more selection and suppliers to its fulfillment network.
Sustainable profitability
One knock against the company in the past has been the losses on its bottom line. Wayfair hasn't reported much profit in recent years as building CastleGate cost money. But that is changing.
Shah made the following statement on the earnings call, which signals a turning point for the business financially:
Wayfair has matured and reached the point where we can sustainably marry growth, profitability, and continuous investment each year. At the same time, we remain comfortable with the quarterly volatility that inevitably results from disruptive thinking.
Despite the spending to support its warehouses, Wayfair generated positive free cash flow of $130 million last year. This indicates the company's expanding scale is starting to translate to better economics, which is a great sign for the company's long-term health and ability to reward shareholders.
The stock has been volatile throughout its trading history, but the current share price offers relatively good value compared to leading industry peers. If investors can hold shares for at least five years, I believe there is a good chance of earning market-beating returns off these lows.
