This time a year ago, Wayfair's (W 7.16%) share price was around $250, but after five consecutive quarters of declining revenue, the stock has sunk to $55 at the time of writing. Management has blamed lower consumer spending as a result of inflation and other economic concerns for the company's weak performance. 

Investors are also concerned about Wayfair's deteriorating profitability. Through the first half of 2022, the company reported a loss of $697 million on revenue of $6.3 billion. 

With the company's finances deteriorating amid a weak backdrop for retail sales, investors are probably wondering if Wayfair can get back on track and whether the stock is worth holding.

Where Wayfair fits in the broader retail market

The good news is that revenue showed some stability in the most recent quarter, climbing 10% over the first quarter. Wayfair has greater potential than this since it was consistently posting 34% or better revenue growth leading up to 2020.  

There's no doubt the online home goods market is a massive long-term growth opportunity. Wayfair has a brand that comes front of mind when shopping for furniture online, so investors should feel confident about the future. Euromonitor estimated the market size at over $800 billion in 2021, with the home goods category expected to reach $1.2 trillion in value by 2030. 

But those forecasts appear less meaningful to investors who are seeing the company struggle in this environment. The important question is, what happens now? Can Wayfair return to growth in a weak retail spending environment?

The first thing to note is that Wayfair's problem mirrors that of other retailers. For example, Target reported in May that it was seeing customers shift spending away from furniture and appliances to smaller items, such as décor, candles, and seasonal assortments. 

The pandemic created a tsunami wave of home spending, which sent Wayfair's revenue up 55% in 2020. Monthly retail furniture sales accelerated from the pre-pandemic peak of $11 billion to $12.8 billion by the end of 2021.

US Census Bureau data showing the growth in U.S. retail home furnishings over the last five years.

Wayfair is getting pulled down by the broader retail environment, so it likely won't fully recover until the headwinds in the economy fade away. History gives us a guide on what to expect in the home goods market when the economy dips into a recession. During the 2008 recession, retail home furnishing sales fell to less than $7 billion from the 2006 peak of over $11 billion. It took a decade for retail furniture sales to reach its pre-2008 levels again.

Wayfair's revenue growth over the next decade will likely be much lower than its pre-pandemic rate of growth. There is a correlation between Wayfair's revenue and the overall change in retail home furnishings sales. Notice how Wayfair's quarterly revenue in this chart resembles the rise and dip reflected in the broader home furniture market from 2020 through the recent quarter.

W Revenue (Quarterly) Chart.

W Revenue (Quarterly) data by YCharts.

What's apparent is Wayfair's ability to gain market share. Over the last five years, Wayfair has roughly doubled the rate of growth of the home furnishings market, so Wayfair can still grow even in a slow retail environment. In fact, management believes they can grow revenue eight times over the next 10 years from the $14 billion generated in 2021. That implies a compound annual growth rate of about 23%.

Profits are vital

The near-term uncertainty in the economy places more importance on Wayfair's bottom line, especially considering the company ended the second quarter with $3 billion in long-term debt on its balance sheet compared to $1.7 billion in cash and short-term investments. It's crucial that management gets the business to positive free cash flow. Over the last four quarters, Wayfair's free cash flow was negative $764 million.

Management understands the urgency. During the second-quarter earnings call, CEO Niraj Shah said their priority in the near term is to steer the business toward positive adjusted operating profit and positive free cash flow.  

The stock can rebound over the next year if the business shows significant improvement. After all, the stock is trading at a cheap price-to-sales ratio of 0.41. If Wayfair shows improvement on the bottom line, the stock will likely move higher.